Glassman has gone to great lengths in the Wall Street Journal and elsewhere to explain why their prediction didn’t come to pass. Chief among his reasons is that GDP growth hasn’t been nearly as robust as they projected. Their assumption was real GDP growth of 2.5%, which was slightly less than the historical norm of 3% since World War II. The actual number was just 1.8%, with tame inflation making the result even worse. Given the shortfall — combined with heightened investor fear after the dot-com bubble in 2000 — the authors didn’t stand a chance.
At the 2001 annual meeting of Berkshire Hathaway (BRK.B), Buffett argued that an investor can expect long-term returns of 6.5% based on 5% nominal GDP growth and 1.5% in dividends. Glassman and Hassett used a figure that was within a half a percentage point of Buffett’s assumption, yet failed to achieve a return anywhere close to 6.5% annually.
Ron Baron’s projection calls for 7% annualized gains over the next 20 years. Even if the GDP growth rate returns to its nominal norm of 6% with tame inflation, the dividend yield must remain higher than 2% annually in order to achieve this goal. Long-term, this seems highly unlikely because any appreciation due to stronger GDP growth will result in the yield dropping below 2%.
From the perspective of globalization maxing itself out, you have to wonder whether the Dow 30 can find enough earnings growth to double in price twice during the next 20 years.
Given recent experiences, that’s a lot to expect.
And yet, I still think Dow 60000’s chances are actually pretty good.
Ron Baron’s not some flake, but a bonafide stud when it comes to portfolio management. Remember that before just dismissing his call. And also remember this:
Americans found out the hard way that you can’t rely on your home to fund your retirement. You have to buy equities if you have any hope of building a nest egg for retirement.
I believe America’s best days are actually ahead of it. All kinds of industries will thrive in the next three to five years; the country’s going to be in a much better position than anyone realizes or expects. The only thing that stops the Dow from hitting 60000 within 20 years is a citizenry that forgets its history (2000 and 2008) and goes back to the way it used to be.
At the end of the day, most investors who stood their ground and stayed in the markets during the 2008-09 recession have got their losses back and then some. Patience reaps rewards.
*March 2000 data used because December 1999 data could not be located.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.