Dow 55853.4227!!
I ran across this from John Bogle, writing a decade ago:
The Four Dimensions of Investment Return May 21, 1998: Recently, The Washington Post columnist James Glassman and Kevin Hassett of the American Enterprise Institute reassured the bulls. Under the four-column banner headline, "Are Stocks Overvalued? Not a Chance," The Wall Street Journal gave their article extraordinary prominence. Using the Siegel data, the authors concluded that stocks, based on their long-term historical returns, were less risky than bonds. So they asserted that equities no longer required their historical (modern era) risk premium of 4.8% over bonds. Indeed, equities required no risk premium at all. With bond yields at 5.9 percent, and the assumption that both earnings and cash flow on equities would grow at a nominal rate of 4.9%, the authors, "using a simple and accepted formula," concluded that the justifiable price-earnings ratio for stocks (I hope you don't shock easily!) is 100 times. With this potential four-fold increase in stock prices, they concluded, "pundits who claim the market is overvalued are foolish."
An eminent dissenter quickly fired back. Two weeks later, under the two-column headline "Stocks Undervalued? Well Not Quite," Professor Siegel himself responded. "It is totally unrealistic, and contrary to historical data, to assume that investor cash flows grow at the earnings rate." (Only about half of earnings are distributed to investors.) So, "real returns should equal—and have equaled—the earnings yield. At a 4 percent yield (price-earnings ratio of 25), "the future real return from stocks will decline markedly," to about the same as real returns on bonds (3 to 4 percent, net of 2 percent inflation). "So prospectively stocks have already closed most of the return gap with bonds, and the equity premium has nearly disappeared.... It is wrong to say that stocks are underpriced at current levels.... In no way can the high stock returns of the past five or 15 years persist..."
That reminded me that notable American Enterprise Institute wingnuts Kevin Hassett and James Glassman not only argued in the late 1990s that the rational valuation of the Dow was 36,000, but they also forecast that it would thereafter grow at a (nominal) annual rate of 4.9% per year.
Which means that today, a decade after they launched their theory onto the seas of investment analysis, their theory for the appropriate value of the Dow places it at 55,853.4227
