The Dow at 116,200? Hey, it could happen
As the Dow Jones industrial average crossed 10,000 Tuesday and then fell back, I was reminded of a speech given in 1995 by the late Bill Berger, the legendary investor who started the now-extinct Berger family of mutual funds.
At the time of that mid-'90s talk, the Dow stood at 4,800 and investors were speculating on when it would cross 5,000 for the first time and how big a barrier that might be.
The fear was that the market would react to crossing the mark, that it couldn't handle the prosperity of 5,000 without having a setback.
Berger said he couldn't predict precisely what would happen when the 5,000 line was crossed, but he was willing to pick a much bigger number. He called for the Dow to hit 116,200 -- in the year 2040.
Berger's logic was that a move to 116,200 over 45 years would be the same as the increase from 200 to 4,800 that he had seen in his first 45 years as an investor.
But since the Dow first crossed into five-digit territory in early 1999, anyone hearing Berger's forecast would think it silly. The Dow has spent most of the past four years looking as if it might never get back to 10,000, let alone going 10 times higher.
Run the numbers, however, and you'll see an amazing thing. Not only is Berger's prediction on pace to come true, but despite a bear market he's actually ahead of schedule.
For the Dow to reach Berger's prediction -- 4,800 to 116,200 -- it requires a gain of about 7.33 percent per year. To go from where the Dow is today -- roughly 9,920 -- to 116,200 over the next 37 years will require an average annualized gain of 6.875 percent.
One other thing that has changed is the feeling that 10,000 is any true sort of barrier.
In 1999, some observers expected it to be taken as a bullish sign of a robust economy. Others feared "10,000 backlash," where any move above the line would be countered by fears.
What we have learned is that any landmark is just another number. Psychologically for investors, it will be good to see the Dow cross 10,000. It will be better to feel comfortable that the average is on its way to 116,200 again.
. . .
While the Federal Reserve Board did not move interest rates on Tuesday, most observers believe it will next year.
The big question is when.
Many observers believe the Fed won't move in an election year, because hiking rates could backfire against the current administration.
But talk to enough folks close to the Fed, and they will convince you of two things:
They're more concerned with moving rates at the right time for the economy than at the right time for the Republicans.
There could be some political capital to be gained from a rate increase.
Increasing rates, which would be low by anyone's measure even if they were to double in 2004, is good for "income investors," the politically correct name for older Americans who vote more than the younger generations.
What's more, if rates are increased at the right time, it will give the Republicans a platform to discuss the relative strength of the economy and its ability to withstand a rate increase and continue growing.
Regardless of when rates rise, there is a danger for consumers this holiday season. Throughout the period when rates have been falling, average credit card interest rates have moved far less than mortgage rates. Lenders who have been squeezed by shrinking rates are looking for any excuse to raise card rates, and the threat of a Fed increase is enough to do it.
The problem is that consumers who go out and rack up the holiday purchases on credit this year may wind up facing an increase next year. That will make the holidays that much more expensive than planned.
. . .
Last week, President Bush gave a speech at The Home Depot in Halethorpe, Md., and as he took the stage he declared: "I left my credit card at home."
Throughout the rhetoric surrounding tax cuts and credits and rebate checks over the past couple of years, the idea has been that consumers were supposed to be propping up the economy. Spending, particularly of give-backs from the government, was elevated to practically a patriotic duty.
Well, if the top dog can leave his card at home this holiday season, so can you. Patriotism begins at home, and it's about time consumers started thinking that the best thing they can do for the country is to reduce their credit card debt.
Chuck Jaffe is a senior columnist
at CBS Marketwatch. He can be
reached at jaffe@marketwatch
.com or at P.O. Box 70, Cohasset, MA 02025-0070.
