Okay, I am usually a modest sort.
But today I must make an exception. On March 22, 2013, on CNBC, I predicted that the Dow Jones Industrial Average would hit 25,000 in 2017. The show’s hosts expressed extreme skepticism, and at least one of my clients called me “crazy.”
At the time, the Dow stood at 14,421, and investors’ mood was gloomy. “I’d call you a bull, but that wouldn’t even be doing it justice,” said one host.
But I was, to all intents and purposes, right. The Dow hit 24,837 in December 2017 and broke the 25,000 barrier four days into 2018. So, I was right within 163 points, or four days, depending on how you want to count.
When I made my prediction, the Cyprus crisis was on everyone’s mind. Major banks in Cyprus were in danger of collapse, and the government’s credit rating was downgraded to junk. Pessimists feared a domino effect spreading to Portugal, Spain and Italy.
“Aren’t you underestimating what’s happening over there? said another CNBC host, referring both to Cyprus and to Europe in general.
I replied that, in my opinion, U.S. investors overemphasize developments in Europe, and don’t pay enough attention to what happens in Asia, Canada, and Latin America. I noted that Canada, Mexico, Japan and China were our biggest trading partners, with no European country ranking higher than fifth.
I also repeated what I had been saying to clients at the time. “Crises have a way of turning into problems, and problems have a way of getting resolved, imperfectly and gradually.”
I was then asked, “Are you overestimating what’s going on in the United States to underpin such a bullish forecast for the Dow?”
I replied that in my opinion government actions weren’t the main force helping the economy. For the most part, I said, “the economy is recovering of its own natural forces.”
I went on, “We’ve had 12 years of subpar growth, we’ve had 12 years of up and down with little net progress in the market, and people have forgotten what a strong economy and what a secular bull market look like.”
Wall of worry
What lessons can be drawn from all this, other than the fact that I can be right once in a while?
One lesson is that the old adage is true: The market climbs a wall of worry. Just think of some of the things the U.S. stock market has had to overcome:
• In the 1950s we had a cold war with Russia, the Berlin crisis, the Suez crisis and nuclear fall-out from above-ground weapons testing.
• In the 1960s we had the Cuban Missile Crisis and the Vietnam War.
• In the 1970s there was Watergate, the Nixon resignation, the Arab oil embargo and “stagflation.”
• In the 1980s, the AIDS crisis raged and interest rates hit double digits.
• In the 1990s, President Clinton was impeached (though not convicted) in the Lewinsky scandal, and the U.S. fought a war in Kuwait under threat of chemical weapons.
• In 2000, a presidential election was a dead heat, leaving the outcome in doubt for weeks.
• In 2001, we suffered a terrorist attack on the World Trade Center and the Pentagon.
I could go on, but you get the point.
Despite all of these events, plus a handful of recessions and bear markets, the U.S. stock market (as measured by the Standard & Poor’s 500 Index) has returned 10.85 percent per year over the past 30 years, 10.35 percent per year over the past 50 years, and 11.66 percent per year over the past 70 years.
Another lesson is that one shouldn’t focus too much on near-term events, but should keep the long-run picture in mind.
People tend to “anchor” on the status quo as the baseline for their predictions. Economists rarely predict any change that’s more than incremental.
People, including investors, also have a “recency” bias, putting disproportionate emphasis on events that happened recently, even if the longer-term patterns are more likely to be typical. In March 2013 that bias forced people to focus on Europe in general and Cypress in particular.
Finally, people have a “saliency” bias. More people are trampled to death by pigs than eaten by sharks, but you’d never guess that from public fears of the shark menace. In 2013, investors naturally were still fixated on the market’s last shark attack -- the financial crisis of 2007-2009.
We’re all human, so none of us can totally free ourselves from these biases. But it helps to try.
Click here to see the CNBC interview from 2013.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Mass. His firm or clients may own or trade securities discussed in this column. He can be reached at email@example.com.
John Dorfman: Prediction about Dow’s rise is nearly a bull’s-eye
Okay, I am usually a modest sort.