Outlok: Dow at 36,000?
Wednesday 01 September 1999
At a recent west-coast conference for technology and Internet glitterati it was argued, apparently quite seriously, that the Dow, far from being overvalued, is in fact grossly undervalued. According to a couple of academics who are just about to publish a book on the matter, the Dow should be at 36,000, or roughly three times the present level.
This, by the way, is not some kind of long-term forecast, but where the proponents of this theory believe the Dow should be right here, right now. If ever there was proof positive that American investors, brimming over with Internet-inspired optimism and confidence, have taken leave of their senses, this is it. When apparently respectable voices begin to argue this kind of clap-trap, you know it's all over.
The argument is so exquisitely ridiculous that it is worth repeating. To get to this level, the market needs to reach an earnings multiple of more than 100 times. This is justified on the basis that we live in a new economy in which the old rules don't apply. As a consequence, there should be no so-called "risk premium" priced into equities, or, put another way, the return on equities should be as low as, if not lower than, that on bonds. During the course of the bull market of the 1990s, the risk premium of equities to Treasuries in the US has already more than halved. So why should it not fall to zero?
The answer, of course, is that it has never done so before, despite a a series of technological revolutions down the ages that were in the scale of things of probably rather greater significance than the present one. To argue that the risk premium should fall to zero is therefore also to argue that history is bunk.
The whole contention is powerfully reminiscent of Nomura, which only months before the Tokyo stock market bubble burst at the end of the 1980s, placed advertisements in the press explaining why the market would double again. As long as Americans and their maniacally day-trading spouses continue to believe that stocks only go up, the market will carry on rising. But make sure you are not standing in the way when the scales finally fall from their eyes, and they decide to sell. The tragedy of it is that if Wall Street goes, it will take our own relatively cheap London market with it.
- 1 Rarest Beanie Baby bought for just £10 at car boot sale could be sold for £62,500 on eBay
- 5 Cancel Sky at your peril: man spends 96 minutes in chat but fails to get rid of service
Rarest Beanie Baby bought for just £10 at car boot sale could be sold for £62,500 on eBay
Katie Hopkins and The Sun editor are reported to police for incitement to racial hatred following migrant boat column
'Jihadi John': Isis executioner Mohammed Emwazi wanted to wage jihad in Somalia until his friends were betrayed and killed by al-Shabaab
Parma, Missouri: 80 per cent of town's police quit after first black mayor is elected
Australian student Tommy Connolly, 23, adopts his pregnant, homeless 17-year-old cousin to give her a chance at 'a better life'
If I’m being racially abused I don’t need a stranger with a saviour complex to rescue me
The only black face in the Ukip manifesto is on the page about overseas aid
Ukip is the only main political party to not address LGBT rights in its manifesto
Food banks: One million Britons will soon be using them, according to Trussell Trust
Religion isn't growing, it is becoming vigorous in its demise, says philosopher AC Grayling
BBC election debate: The one photo that summed up the whole 90-minute leaders debate
iJobs Money & Business
£30 - 35k (DOE): Guru Careers: We are seeking a Pricing Analyst with experienc...
£24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...
£21000 - £24000 per annum: Ashdown Group: The Ashdown Group has been engaged b...
£45000 - £50000 per annum + benefits : Ashdown Group: A highly successful, int...