The Dow 11,000 and beyond – what’s next?

So the Dow has reached the mystical 11,000 point mark for the first time since September 2008. Where is it headed from here and what does that mean for us?

Well, unfortunately I’m not one to get too wrapped up in milestones. However, added to the fact we have just screamed past the 5,000 mark for our own All Ordinaries Index this sort of thing tends to get investor’s attention.

It’s rather noteworthy for the fact that both indices are roughly where they stood just before the Lehman Brothers collapse in September 2008. For those who love their stats the Dow closed at 11,421 the day before the Lehman Brothers collapsed.

Hard to swallow

Since the lows reached in March last year of roughly 3,111 for the All Ords, our market has returned better than 60% since then and the Dow (and S&P 500) an somewhat better 70-80% return.

This has got many asking: is the market now overvalued?

If you look at the data provided by Professor Robert Shiller of Yale, the S&P index (not the Dow) is trading at a cyclical adjusted price-to-earnings of 21.7%, around 33% above its long-term average. If you follow that analysis then yes it is overvalued, but if you were asking me to answer that question I’d first probably give you a blank stare then get the crystal ball out, and well as you can gather, I wouldn’t have a clue what the market will do from one day to the next.

Interestingly that’s precisely the same response you would get from the world’s greatest investor.


What I do know at this stage is the one thing that has surged further and faster than share prices is the revised rate of expected corporate earnings over the period from that early March, when apparently our Wall Street bankers took the financial world to the precipice of complete annihilation.

Well the chances of that happening were slim to none. That sort of comment gets thrown around a lot with scant disregard, but the old chestnut “too big to fail” has to be abolished.

If nothing was done, the markets might have kept going down, but the market system would surely survive.

What is next?

To answer that one is really one of Mr Rumsfeld’s unknowns. You can talk to someone who will give you a good case for a bear argument, then talk to someone with an equally compelling bullish one. But given the substantial rise in forward earnings estimates I’m more likely opt for the latter.

One thing I’m quite sure of is the closer we are to the bottom of the washout in the markets (March 9 was still only a little over a year ago) the less likely it will occur in the immediate future (there may well be a dip or two here and there) but if you were ask me in about four or five years time I’m likely to give you a different answer.

Some Harvard genius will engineer the next financially geared “package” or “product” and the further along we get the more volatile, greedy and overpriced the market will become again we are the likely suckers pulled into the vortex created by them. That’s human nature.

Nick Christian is a Financial Adviser and planner and authorised representative of Millennium3 Financial Services.

The views and opinions expressed within this letter are those of the author and do not necessarily reflect those of Millennium3 Financial Services Pty Ltd.

The above is general in nature and should not be acted upon without seeking the advice of a professional licensed financial planner.


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