Unless the U.S. economy enters into an extended period of negative growth, Dow 100,000 is not a question of whether, but rather, when.
The Dow Jones Industrial Average reached 100 in January 1906, 1,000 in November 1972 and 10,000 in March of 1999. In mathematical terms, growth can be arithmetic, where gains are linear, or geometric (logarithmic), in which the progression is based on percentage increases. For financial purposes, where progress is typically based on percentage gains, the compounding effect recognizes that each, successive increase is calculated on a higher number.
The recent ebullient and excessive press coverage of the Dow Jones Industrial Average reaching 20,000 fails to reflect the relative unimportance of this milestone.
In a linear progression, the next milestone, after reaching 20,000, would be 30,000. In a geometric progression, the next comparable milestone would be 40,000. In other words, a move from 10,000 to 20,000 is a 100% increase, but a move from 20,000 to 30,000, is only a 50% gain. In order to maintain the 100% progression, 10,000 goes to 20,000 and then to 40,000.
If you assume that the Dow can grow at a compound average annual rate of 7% (assumption not prediction), the Dow would achieve a 10 fold increase every 35 years.
You may ask,” that’s a long time, why should I care?” Consider a bit of perspective. The Dow first reached 600 shortly after the end of my second year of full time employment at, what was then, National Bank of Detroit.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA®
