On December 28th, I appeared on CNBC and suggested that the Dow Jones Industrial Average (DOW) would hit the twenty thousand mark in January. Not an out-on-the-limb prediction by any stretch. In what should not have been a headline, but was, I then predicted the index would hit 30K over the next 4-5 years. Which means the market would return about what it has historically: 8-9% per year.
On January 30th after the DOW did indeed hit 20K, I published a commentary that I will partially quote here: “What is behind the achievement of DOW 20K and what, if anything, does it signify? Investors have waited 18 years for the DOW to double from 10K to 20K…If the DOW’s appreciation had not been confirmed by strong performance in the S&P 500 and the NASDAQ, we would likely not take note. Importantly, the DOW’s rise is also confirmed by strong fourth quarter earnings.”
Earnings growth during the first quarter of 2017 were even more spectacular logging in around 15% year over year. Stocks have continued to climb, already achieving my expectation for the entire year. “…we are optimistic that earnings will support a reasonable, high-single digit return for stocks without any benefit from pro-growth economic policies” promised by the Administration. In other words, stocks trade on earnings and earnings growth expectations. As I remarked on CNBC, the economy was strengthening prior to the election–but President Trump’s pro-business bent provides a tailwind.
When I began my career, the DOW was trading at 1,200. Today it is trading at 20,000. There have been many dips along the way but one very important constant: earnings drive stock returns.
(BTW–please check out some of the stocks I recommended in the CNBC interview linked- to above. These are stocks to own for a lifetime. Though they have performed well they are companies you could feel comfortable owning for a lifetime.)