It has taken the DJIA a little over 32 weeks to move from 6,547 to just over 10,000, a move up of 53%. The index will be back over 14,000 by the end of May next year if it continues its rise at this rate for the next 32 weeks.
Each week most market experts say that the Dow cannot go any higher. Earnings are not good enough. The economy is not strong enough. Unemployment is too high and so is the federal deficit. None of that has kept the market from its persistent climb. The market dropped from over 14,000 in October 2007 to just above 6,500 in March, a sixteen month period. Why shouldn’t it retrace itself in about the same time?
The DJIA is not going back to 14,000 next year, but there are several arguments that it could rise much more between now and the middle of 2010. The most important of these is fourth quarter earnings. The current earnings season is already priced into the market now that Google (NASDAQ:GOOG), GE (NYSE:GE), and Apple (NASDAQ:AAPL), JPMorgan (NYSE:JPM), and Goldman Sachs (NYSE:GS) have released their numbers. There may be some surprises among the big oil and consumer products companies, but they are not going to be shocking enough to knock the market off its present course.
Fourth quarter earnings are usually not announced until March because they mark the end of most corporation’s fiscal year. This means between now and then there will be another five or six months of data from the government and private research firms showing trends in housing, employment, credit, industrial activity, and consumer spending to be factored in as the end of the first quarter approaches. The data for the holiday retail period will have been announced. The effects of the stimulus package, if there are any that are significant, will begin to show up in earnest by the beginning of 2010.
Not much will be left to the imagination of economists about next year’s profits and financial prospects by the time that 10-Ks covering 2009 are filed.
Reasonably good unemployment numbers for October, November, and December could give the market support through the end of the year. “Reasonably good” means that jobs losses in each of the months will not average above 200,000. Numbers higher than that raise the risk that the recovery is only temporary and that the first quarter of 2010 could turn out to be the high water mark of the recovery. Holiday retail sales will be released at about the same time as December employment figures. Modestly good numbers on both counts should keep the market moving higher.
A look at analyst estimates for the full year 2010 EPS at several major companies show that Wall St. actually expects next year’s earnings to be extremely strong from consumer goods, retail, energy and big pharmaceutical companies. It will be much clearer in four or five months if those estimates can be reached. The forward P/Es for many Dow components are under 14, so continued optimism about earnings and the economy could push share prices of these companies up without the stocks becoming wildly overvalued.
No one would have imagined that the DJIA would fall from over 14,000 to under 6,600 in what is, in the history of the index, a very short period of time. Only a failure of the imagination would keep analysts from seeing that it could return to its peak nearly as quickly. Three or four things, all of them critical to the health of the economy and big business need to go right to drive the market to a new high. Progress for each of them is well within the realm of the possible.
Douglas A. McIntyre
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