November print edition headline Dow 3,600 corrected to Dow 36,000 in online and virtual editions.
by Kenneth J. Entenmann, CFA
Well, we finally made it. The long-ridiculed prediction by James Glassman and Kevin Hassert in their 1999 book titled “Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market,” has arrived.
It took a lot longer to get here than predicted, but we made it. The market has a habit of humiliating the great prognosticators of the world. But the central premise of the book remains based in the simple math of compounding. According to Wharton Finance professor, Jeremy Siegel, since 1802, equities have produced annual average total returns (including price changes and dividends) of 6.5 percent to 7 percent after inflation. In a recent Wall Street Journal article today, Mr. Glassman does the math, and it suggests we will have a Dow 1,000,000—in 50 years.
Unfortunately for market forecasters, the market never moves in a linear fashion and major disruptions can knock the markets off track, often for prolonged periods. In defense of Glassman and Hassert, few investors predicted the dot.com bubble, the Financial Crisis of 2008 and COVID. Yet here we are—Dow 36,000. The record is clear, there are no 20-year periods where equities posted a negative total return. It is a testament to the power of long-term, discipline investing.
Today, the equity markets have risen to record levels once again. As discussed on my Market Insights blog, these record levels have been achieved by incredible earnings growth, very benign interest rates and massive liquidity. The market is here despite a host of worries; COVID, dysfunctional government and the looming threat of inflation.
The economy slowed in the third quarter, posting a disappointing 2 percent GDP. The market has concluded that this slowdown is indeed “transitory” and was due largely to the August-September Delta surge. Today, COVID cases, hospitalizations and deaths have once again plummeted, which is great news.
And there are indications that the economy is picking up again. This morning, ADP’s private sector job indicator increased by 571,000, easily beating the 395,000 estimate. Importantly, the strongest employment growth was in the hospitality sector. Also, this morning, ISM Service PMI soared, and factory orders increased in October. Company earnings reports have been strong and have demonstrated that companies can pass price increases along, at least for now. In short, there is plenty of demand out there—and that is a nice problem to have.
With the economy recovering from the Delta slowdown and the employment numbers improving, the Fed now has the cover to begin to change monetary policy.
The recent improvement in employment should allow the Fed to focus on its other mandate, stable inflation. I continue to think the Fed is behind the curve on inflation. The “transitory” inflation goal posts keep getting pushed back; sooner or later it could be a big problem. The Fed faces a dual inflation threat in supply chain disruptions and labor shortages.
Eventually, the supply chain mess will work itself out, but it will take time. I believe it will take longer than it already has. Yesterday, the CEO of the Port of LA reported the number of ships “anchored” in the harbor has increased from 40 to 70. Shortages of key commodities continue to threaten economic growth.
Of course, the semiconductor industry is responding and building more capacity, but that will take time to come on-line. Ford’s CEO announced in their earnings report that Ford expects the shortage to extend into 2023. Does this meet the definition of “transitory?”
Energy costs are rising as well. New regulations have resulted in less supply of fossil fuels. Policy encouraging renewable energy is great, but it is not ready for prime time. Energy shortages are impacting economic activity around the globe. Politicians are scrambling to boost energy production that their policies constrained. This will also take time. It is unlikely that energy inflation will go away any time soon.
In my opinion, labor shortages will be more persistent. I’ve noted in the past the elevated level of the JOLTS (Job Opening and Labor Turnover) index. There are over 10 million job openings in our economy and roughly 8 million unemployed. This mismatch should be easy to fix, yet it persists.
The expiration of “enhanced” Federal benefits in August-September did not lead to higher labor participation. “Regular” unemployment benefits remain and other policies such as rent moratoriums and enhanced child credits seem to be keeping folks on the sidelines.
But it will take time. Another category impacting the labor force is the “excess retirees over trend” category. Cemblast estimates that 1.5 million people chose to retire when the COIVD crisis struck. Certainly, robust stock and real estate markets help to boost retirement rates, but the COVID crisis looks to be the main driver of these retirements. It remains to be seen if these folks can really afford to stay in retirement. Regardless, it is unlikely that they will return to the labor force in mass. Next, visas granted to immigrants and non-immigrant temporary workers declined meaningfully during the pandemic. He estimates that around 1 million people are waiting for their employment-based visas.
Lastly, self-employment impacts the labor force. He estimates nearly 800,000 became self-employed. This trend saw people leaving manufacturing and agriculture for construction and transportation. Again, it is unlikely that this trend will reverse materially any time soon. Add it all up, and roughly 6 million people have left the workforce. Will some reenter? Of course, but it too will take time. Meanwhile, Help Wanted signs will continue to proliferate.
In my opinion, a change in monetary policy is in order to combat more persistent inflation. The Fed’s Nov. 3 action demonstrates a renewed focus on inflation and the beginning the process of “tightening” policy.
I believe tapering is expected and should not have a major impact. Any increase in interest rates is likely to be modest. Regardless of the change in interest rates, any market reaction will be but a bump on the road to Dow 1,000,000. Investors need to remain patient and disciplined in these challenging times.
This was originally published on Nov. 3 on NBT Bank’s Market Insights blog at www.nbtbank.com/marketinsights.