Jeffrey Hirsch isn't frightened by the forecasting ghosts of James Glassman and Kevin Hassett.
Mr. Glassman and Mr. Hassett themselves aren't dead, but their infamous forecast made at the height of the tech boom in 1999 - that the Dow Jones industrial average was destined for 36,000 - died along with the bursting of the tech bubble on which it was built. Their prediction has become the poster child for the foolishness of making big predictions about the stock market.
The Dow has yet to make it even halfway to that oft-ridiculed target. Yet Mr. Hirsch's new book, Super Boom: Why the Dow Will Hit 38,820 and How You Can Profit From It, lays out his argument that the Dow will vault to more than triple its current level by 2025. This despite the fact that the Dow's ups and downs have left it barely 10 per cent higher than it was 10 years ago.
The forecast by the editor-in-chief of the widely read Stock Trader's Almanac follows much of the same logic that his father and mentor - Yale Hirsch, founder of the publication - used when he made his own bold "Dow 3,420" forecast in 1976. That prediction, that the Dow would rise 500 per cent from its 1974 bottom within 16 years, proved prescient; the S&P 500 reached the target in 1990 and the Dow followed in 1992.
His forecast is grounded in historical patterns that have fuelled long-term upward trends in the Dow several times over the past century: Inflation-fuelling periods of war, followed by peace and an eventual calming of inflationary pressures, during which the markets surge - typically, more than 500 per cent and typically, within 16 years.
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David Parkinson, The Globe and Mail: Other people have gone out on a limb making bold predictions about the Dow, and have become the butt of a market joke for a decade. Why do you think you're going to be different?
Jeffrey Hirsch: Metaphorically, if Glassman went out on a limb, I'm going on a root here. Because this calculation is based upon a move from the March, 2009, low of 6,470 over 15-plus years. They were talking about a continuation of unprecedented market gains at a very lofty level at the end of 1999. They were looking at a momentum kind of move and a new world order or a "new normal." I'm looking at a move with historical precedent from an extreme low point in the market.
This is based on a pattern and forecast that my predecessor, father and mentor made back in 1976. … It's also based on a more macroeconomic, geopolitical, long-term cycle view, as opposed to valuations of stocks versus bonds.
DP: This big-picture stuff seems quite a different way of looking at things than The Stock Trader's Almanac - where you focus on historical, seasonal trends in market data within a year or maybe a few years.
JH: This is an extension of that. … This is based on the historical patterns revolving around war and peace, and inflation, and economic expansions in the long-term secular bull and bear markets. We've done a lot with that over the years. It's a theme or umbrella over the shorter-term seasonal themes that we track and trade and evaluate.
DP: 38,820 sounds like a lot, sitting where we are now.
JH: Once you do the math, it's not out of the realm of historical returns for the market over long periods of time. Taken from the 1999 close, it's less than 5 per cent [a year] From the low of March, 2009, it's 11.2 per cent. From the end of 2010, it's less than 8.5 per cent. That's pretty much the average historical annual return of the Dow.
It's a large number, it jumps out at you. "Super Boom" in and of itself is a pretty bold statement. But we've seen it before. History doesn't repeat, exactly, but it does rhyme. That's why I'm not concerned that our military engagement overseas has not wound down yet like it had in 1976, when Yale made his forecast. I see things aligning in a similar way.
DP: Commodity inflation has been a big element adding to the inflationary pressures in the current cycle. Does that suggest that a commodity-heavy market such as Canada stands to outperform in this cycle?
JH: Canada and commodity-heavy economies have done well already, since 2000 - or, at least, better - with the long commodity boom we've been in. My concern is that as inflation picks up, the commodity bull fades, the stock bull begins, and the commodity-heavy economies don't outperform. However, I do think the entire world will be lifted by this boom, as it has in the past.
DP: Is the best strategy to just buy and hold a broad index-based ETF tracking the Dow?
JH: I don't think the next several years are a buy-and-hold situation - just like the late 1970s or the periods right after World War I and World War II. … My contention is that we're still in the secular bear, and the real secular bull doesn't start until 2017 or 2018. … Today's market action, along with some of my shorter-term and intermediate-term analysis, has me concerned that we'll be testing that 10,000 level again, not just this year but over the next several years.
If you're going to buy and hold, don't buy willy-nilly at any time. I wouldn't be buying right now. I would be waiting for a pullback, and then buy. I'm talking about those 10- to 20-per-cent pullbacks you see every year. When you see the Dow near or below 10,000, or you hear the bear market officially declared in the media - by your publication and/or others - that's the time to buy.
David Parkinson