Excited stock market bulls think the Dow’s march to 16,000 won’t take nearly as long.
They’ve got good reason to think that.
While it took the Dow seven years and five months to go from 11,000 on May 3, 1999 to 12,000 on October 19, 2006; it took only six months to then go from 12,000 to 13,000 on April 25, 2007; and only three months to jump another 1,000 points to over 14,000 on July 17, 2007.
It’s taken the Dow four years and just over nine months to decisively rise above 15,000.
What’s even more remarkable than the Dow possibly making it to 16,000 before long, is that the Dow had sunk to 6,547.05 on March 9, 2009. It’s risen 8,509.15 points in only three years and two months.
What’s behind the market reaching this milestone, and will it be easy to add another few thousand points in the months ahead?
A Harbinger of What?
The short answer is: don’t bet against it. But, don’t bet the house on it, either.
First, here are two absolute simple basics why the average can go a lot higher.
Number one: There are more buyers than sellers.
Waves of capital have been flooding back into stocks. According to the Investment Company Institute, which surveys at least 95% of all U.S. domiciled mutual fund families, year-to-date (ending April 3, 2013) equity fund flow trends are the best in five years.
The domestic stock category alone took in over $21 billion through early April. For the week ending Wednesday, April 24, 2013 estimated inflows to long-term mutual funds were $8.42 billion.
Hybrid funds that invest in stocks and fixed income securities had estimated inflows of $1.36 billion. And surprisingly, amid the rising stock market propelled higher by inflows, bonds rose alongside stocks with bond funds seeing estimated inflows of $5.76 billion over the same one-week period.
Number two: There are fewer companies to buy.
According to Wilshire Associates, keepers of the Wilshire 5000 broad-based stock index, there were 6,639 U.S.-based operating companies listed on U.S. exchanges in the year 2000. There were 4,989 in 2004; 4,539 in 2008; and only 3,687 in 2012.
For perspective, there were 3,069 in February1971 and a high of 7,562 in July 1998.
Leveraged buyouts, mergers and acquisitions, companies being delisted and a dearth of initial public offerings have reduced the number of companies available to invest in.
While big companies have gotten exceedingly bigger and float more shares, fewer companies traded on U.S. exchanges makes diversifying harder. At the same time, bigger and bigger institutional money managers seek out the biggest companies with the most shares outstanding to invest in, so they have enough liquidity getting in as they hope to have when they want to sell shares.
From the so-called 30,000 foot-high vantage point, more money chasing fewer companies is a respectable recipe for a rising stock market.
There’s plenty more ammunition out there. The Great Rotation, the dumping of low-yielding bonds and their rush into higher dividend-paying equities with the potential for capital appreciation hasn’t even begun yet.
There are trillions of dollars parked in bonds, that if moved into equities could make 16,000 happen in the blink of an eye, and 17,000 and higher all too easy to accomplish.
Of the Straw and the Camel’s Back
Of course there’s plenty that can go wrong. Just because we’ve gotten past the fiscal cliff and sequestration hasn’t yet been a four-letter word, and Europe has been dusting itself off, and China is still in the business of eating the world’s lunch, doesn’t mean there aren’t rats in the woodpile.
We should keep an eye on the market’s price earnings ratio, which is now higher than its historical norm. We should keep an eye on mechanical issues, like increasing incidents of mini flash crashes that are warning us there are ghosts in the machine.
But, as long as earnings keep rising and the sun sets in the West, and the big picture is the story about more money chasing fewer shares, the market should keep rising.
Will we see 16,000 before Friday? Maybe. But before we get too ahead of ourselves, don’t forget the Dow was above 14,000 in 2007 and fell to below 6,500 in March 2009.
Just keep raising your stop-loss orders as you watch your stocks go higher and higher.
Related Tickers: SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA), SPDR S&P 500 ETF Trust (NYSEARCA:SPY).
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