Will the Dow Reach 20,000 in 2015?

Will the Dow Jones Industrial Average (DJI) reach 20,000 in 2015? Jeremy Siegel, an economics professor at the Wharton School, was recently interviewed on CNBC.com and said the Dow could get there if the U.S. economy grows three to four percent this year. Siegel also believes the market is undervalued and that markets typically overshoot fair value before pulling back. For the Dow to reach 20,000, several conditions likely need to hold: low inflation, low interest rates, low unemployment, low oil and gas prices, and no major supply constraints.

At CFE Finances, we think seeing the Dow reach 20,000 this year would be a great milestone and a good reason for do-it-yourself investors to stay invested. Keep researching, keep investing regularly, and everyone benefits if the Dow hits 20,000. Another tailwind: for several years companies have been buying back their own shares, which reduces the float and makes each remaining share more valuable. At the same time, most Americans are saving for retirement through 401(k), 403(b), IRA, and Roth accounts. Many of those funds are run by managers who buy stocks in large quantities, which supports prices. That trend should continue in 2015 and could help the Dow push toward 20,000.

The average price-to-earnings (P/E) ratio today sits around 17.5, well below the P/E of roughly 30 we saw during the late-1990s bull market and the dot-com era. As investors, we want to buy stocks below their five-year average P/E. Yes, it’s hard to find quality names below that threshold right now, which is why we keep saying patience is essential — patient investing removes much of the risk from buying stocks. The old saying still applies: buy low, sell high.

As I write this, the Dow is trading above 18,000, which looks high and could be ripe for a correction. Remember, corrections are often healthy: they reset valuations and give investors a chance to buy quality companies on sale. Charlie Munger, Warren Buffett’s longtime partner at Berkshire Hathaway (BRK-A), has said repeatedly that patience is the key to successful stock investing. Munger’s estimated net worth is around $1.3 billion.

One more reminder: when adding to your portfolio, diversification is critical to reducing risk. With much of U.S. equity at all-time highs, doing your homework before buying any stock has never been more important. Good luck and happy investing from CFE Finances. We will be in touch with another newsletter soon. If you have any questions or concerns, please email us from our contact page.