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Why Dow 20K is closer than you think

Talking Numbers

With the Dow Jones industrial average breaking above 17,000 last week after a surprisingly strong jobs report, could Dow 20k be a reasonable possibility in the not-so-distant future?

It took just seven months for the benchmark Dow index to go from 15,000 to 16,000. And, it’s been seven months since the 16,000 level was hit. Assuming that pace, the Dow would hit 20,000 by March 2016.

(Read: Dow 17,000? Another milestone matters more)

That’s certainly possible, according to Erin Gibbs, equity chief investment officer at S&P Capital IQ Equity Research. “That’s about a 17 percent increase, which over the next two years is fairly reasonable if you look at earnings,” she said. “We are expecting about 8 percent growth for this year—so another 4 percent or so for the end of the year—and 10 percent growth for 2015. Assuming we continue on this slow, steady, somewhat subpar recovery in the U.S. economy, that is a reasonable long-term appreciation because we are trading at about 15 times forward earnings.”

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Gibbs said the Dow’s price-to-forward earnings multiple is around the upper end of its historical range. Though she believes it’s possible to trade down to 13 or 13.5 times forward earnings, Gibbs believes a 15 multiple is reasonable. “Certainly there could be maybe a 10 percent to 15 percent pullback or correction within that long-term bull trend. But, these secular bull trends could last for several years. Looking at these earnings estimates, this seems possible.”

Richard Ross, global technical strategist at Auerbach Grayson, has some concerns for the index in the nearer term, namely the underperformance of the Dow relative to other major North American indexes this year.

Index

Year-to-date performance

Dow Jones Industrial

2.4%

Dow Jones Utilities

14.2%

Dow Jones Transportation

11.2%

S&P 500

6.8%

Nasdaq Composite

6.7%

“Why are the industrials lagging so far behind these other indexes?” rhetorically asks Ross. “To me, it smells like people are really reaching here, they are chasing these cyclically driven transports in addition to chasing yields with the utilities.”

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While the Dow briefly dipped below its 200-day moving average in February, it has since stayed well above it. Ross sees the index currently in a long-term uptrend but now in a relatively tight trading range over the past month.

(Read: Dow 17,000: Who led & lagged the last 1,000 points)

“Certainly, you could make a case for higher prices in the short term,” said Ross, a “Talking Numbers” contributor. But “even in the context of the strongest long-term bull trend, we have seen 20 percent corrections in 1988, 1987, 2011. I think that we have a similar type of backdrop here, given the absence of volatility, volume, corrective behavior and the high degrees of complacency and almost euphoria that we’re starting to see filter in through the market vis-à-vis M&A, tech IPOs, valuations, etc.”

“In the short term, strength begets strength,” added Ross. “But keep in mind those longer-term corrections within the context of a bull market do occur.”

To see the full discussion on Dow Jones industrial average, with Gibbs on the fundamentals and Ross on the technicals, watch the above video.

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