Market observer Harry Dent claims that the Dow will rally to 17,000 within the next few weeks — before it plummets to around 6,000 by 2016. Harry Dent makes his case in a new book, “The Demographic Cliff.”
Sounds like fun times for investors – but it sounds like book shilling to many of the rest of us.
Let’s address several important points that explain why Mr. Dent is so terribly wrong. The U.S. government, the Fed, Wall Street and the big Banks are “all-in” on the stock market right now. They can’t and won’t allow a serious collapse in the markets.
Ask this question: All those billions of dollars the Fed printed since 2009 . . . where did that money go? It didn’t go to consumers. It funneled to interest-free loans to Wall Street firms, banks and corporations – so that in the end that money wound up in the stock market.
How else can you explain a market that has risen in value despite billions of dollars in net outflows by retail investors from 2009 to 2013?
Investors who bailed on the stock market over the last few years will eventually realize that the stock market is the ONLY realistic place for them to grow their money at a pace fast enough to have a secure retirement and to outpace inflation. Investors will come to realize that CDs, savings accounts, annuities and even bonds are all the new “mattresses,” thanks to the Federal Reserve’s ZIRP policy.
Harry Dent’s prediction sets the stage for what he is calling a “dangerous period” for investors. Talk about an understatement. I think it is rather his very claims that are dangerous for investors, not the current market environment.
What basis does Dent have for making such a sensational prediction? It’s not much. He argues that aging demographics in the U.S. mean we cannot sustain current market and economic activity. That is, we cannot rely on younger folks’ spending to fill the gap of the older generation.
Oh, I see. Another in a long line of doom-and-gloom predictions based on the baby boomers retiring.
Do people really take this stuff seriously? I suppose they do or these sorts of predictions would not be made.
Here’s my crazy, but not-really-so-crazy prediction: The Dow will hit 26,000 by the end of 2016.
No evidence for a crash ahead
Let’s go back to Dent. One of his arguments for a crash seems to be a cursory review of the current economic state and its anemic response to massive amounts of stimulus.
While the recovery has been slow to materialize, it has indeed arrived. What did Dent expect? These things take time. The lack of fireworks-style growth in the aftermath of those messes should be no real surprise.
And things really are not so bad out there. Current economic data, absent this horrendous winter, has been very positive in the early months of 2014. The Federal Reserve has started to remove stimulus. It wouldn’t do that if there was one scintilla of evidence suggesting a Dow-6,000-style crash was on the horizon.
Skeptics will rightly note the Federal Reserve would be the last to identify an environment fertile for a crash, but nonetheless the conditions that would precipitate a crash are simply not present.
If this is a bubble, as Dent claims, in the same vein of the roaring 20s, then I missed something. It’s just not going to play out the way Dent sees it.
Economic growth and pent-up demand
Instead it is far more likely that the Dow hits 26,000 by the end of 2016. It will happen easier than you might think.
All it takes is greater-than-expected economic growth. The experts have us growing at a 3% clip in 2014. What happens if growth comes in closer to 4% this year?
I’ll tell you what happens – the Dow jumps 20% and closes the year within a hair of 20,000. We’ll get stuck on that psychological barrier, but it won’t take long to bust through.
In 2015, that 4% growth inches higher to 5%. That will be enough to push the Dow up another 15% to close at 22,600 by the end of 2015. Then, if growth continues at a 5% clip, a bull market rally will send stocks up another 15% to 26,000.
There you go, and I wouldn’t bet against us.
The housing crash and financial crisis has created immeasurable pent-up demand. It won’t take much for us to hit a 5% growth rate. That is far, far more plausible than the garbage Dent is pushing.
We base this assessment on the exact opposite scenario to the one that Dent predicts.
Baby boomers will keep working
Here is a more rational assessment of the current Baby Boomer population. It’s been called the “me” generation, which rings true: it’s is a generation defined by early adopters of technology, exploration, restlessness, desire. This is not a rocking-chair generation.
Who says this generation wants to retire? More and more who are able are working right up till the grave. That’s a good thing for future economic growth. In addition, there is plenty of population available to replace those workers supposedly about to become dependent on the state.
When baby boomers do finally kick the bucket, the U.S. will see one of the largest generational transfers of wealth. Ever.
GenX and GenY become the new wealthy generation in America.
Harry Dent, Dow 6,000 is SO 1990s.