Songs of experience
Returning to peaks from deep valleys usually a long trip
Now that the Dow Jones industrial average has crossed the 10,000 mark, optimistic investors may be thinking it will not be long before the stock market recaptures the highs it hit in 2000.
If history is any guide, investors should keep their enthusiasm in check. Over the past century, when the market has reached the heights it did in 2000, it has taken a long time -- sometimes more than 20 years -- for stock prices to regain the old peaks.
"At the top, investors are willing to pay high prices for hopes," said John Dorfman, a money manager based in Newton. When stock prices tumble, as they did in 2000, said Dorfman, investors get more skeptical about the future and that skepticism translates into depressed stock prices, often for extended periods
Dorfman and others think it is possible the Dow could reach its old high of 11,722 within a few years. They suggest it could take several years longer for the Standard & Poor's 500 index to equal its high watermark of 1,527. The S&P closed yesterday at 1,071. When it comes to the Nasdaq Composite index, which is primarily made up of technology stocks, the target date moves further out into the future. The Nasdaq currently trades for 1,942. In March 2000 it topped out at 5,048.
"We won't be there for 10 to 20 years," said Thomas O'Neill, a longtime Boston money manager, echoing a widely held belief among investment professionals.
The history of stock market peaks is laid out in gloomy detail in "Irrational Exuberance," a book by Yale economics professor Robert Shiller published in 2000. At three points in the past -- 1906, 1929, and 1966 -- the Dow climaxed after long bull markets. At all three peaks the market's price/earnings ratio -- a measure of investor optimism about the future -- hit levels far above historical norms.
In 1906 investors were excited about prospects for a new century and the new technology that was transforming America. With the benefit of hindsight it is clear 1906 was a terrible time to put money in the market. It took another 10 years for the market to reach its 1906 high of 103.
The next peak came in 1929 at the end of the "Roaring `20s." The bull market of the 1920s was followed by a crash and the Great Depression. The stock market did not regain its old highs until 1955. The third peak came in 1966, another market that was carried along by excitement about the economy and technology. Though it moved higher in the 1970s, it took until 1982 for the stock market to move decisively above its 1966 mark.
By most measures of valuation, stock prices in 2000 were even higher than they were in earlier bull markets. In an interview he gave after his book came out, Shiller predicted another difficult period for stocks. "It's plausible to me that stocks could be trading at the current levels 20 years from now," he told Barron's, a financial publication.
Reached recently on a trip to Europe, Shiller sounded less certain. "I don't have a strong opinion," he said.
Market watchers point out that long and difficult periods for stock prices don't necessarily coincide with periods of economic strife. Warren Buffett, one of America's most successful investors, once noted that between 1964 and 1981 stock prices did not go up at all, even though the country's gross domestic product -- a measure of economic output -- grew by 370 percent.
Most money managers say that talking about the stock market as one entity can be misleading this time around. They say that at the height of the bull market in 2000 many old economy stocks were trading at modest prices. It was the technology stocks, especially the new, unproved technology firms, that reached nosebleed levels.
That split suggests to some managers that the Dow and the S&P 500, which are not dominated by technology stocks, could pass their old highs within years, rather than decades. The Dow would need to rise 17 percent to reach its old peak; the S&P would have to climb 42 percent.
By contrast, the Nasdaq would have to rise another 160 percent, even after a very strong performance in 2003.
"People enjoyed their date with the prom queen so much they would like to repeat the experience," said John Dorfman, recalling the giddy feeling investors had about technology stocks in 2000. Dorfman's advice: Don't expect another date any time soon. "The old Nasdaq peak could be 15 years away," he said.
Charles Stein can be reached at stein@globe.com.
