The Dow did not reach 36,000 in the year 2005. This proves that that market believes stocks are riskier than bonds.
Glassman and Hassett’s book, Dow 36,000, should not be dismissed as a ludicrous failed prediction. It is important to look at their clearly articulated reasons for that prediction. They made a closely reasoned deduction from certain premises, and the fact that the prediction failed showed that their premises were wrong.
In discussing the time frame, they said:
“How soon? The rational time frame is this afternoon. But the process will take longer as understanding spreads about the true risk of stocks. A sensible target date for Dow 36,000 is early 2005, but it could be reached much earlier than that.”
The reason was that because, in their words, it is an “undeniable historic fact” that “the stock market is no more risky than the market for Treasury bonds.”
- The truth is that, over the long-term, stocks are no more risky than bonds or Treasury bills, so…
- With this in mind, investors in recent years have begun to act more rationally, bidding up the prices of stocks and driving down the premium they had demanded when they believed stocks were risky, and…
- Soon, prices will rise to where they will be “perfectly reasonable”—around 36,000 on the Dow Jones industrial average….
In short, again, their own words,
The Dow 36,000 theory depends on the risk premium for stocks disappearing.
The fact is that the Dow did not reach 36,000 at or before the year 2005. The risk premium did not disappear. This shows that their premise, that “the stock market is no more risky than the market for Treasury bonds” is incorrect; or, at least, that the market does not believe it.
In 2011, Glassman said that the reason he was wrong was that “the world changed.” However, in a sense, that’s the point. The risk of stocks includes the risk that the world might change in a way that’s unfavorable to stocks.
If you believe that stocks are no riskier than bonds, then you need to explain why the Dow did not reach 36,000 in “early 2005 or much sooner.” Then add perhaps 10%/year for 8 years and ask why, today, it is not somewhere around 70,000 or 80,000.
Perhaps the publication of the new edition of Siegel’s book later this year will be the catalyst that finally makes investors understand why stocks are no riskier than bonds, causes the risk premium to disappear, and propels the Dow to 70,000 or 80,000. But I don’t think so.