Worst Stock Market Prediction Comes True – Just a Few Decades Too Late

The worst stock market forecast of all time is about to come out, and for all its pitfalls, the advice behind the dire forecast remains some of the best ever given.

That strange dichotomy is now coming to a head as the Dow Jones Industrial Average is about to break through the 36,000 mark, and most observers believe it can hold that level as it climbs the proverbial wall of worry to new record highs.

To be sure, 36,000 is an odd metric to celebrate, but it’s a celebrity number because journalist James Glassman and economist Kevin Hassett wrote a Wall Street Journal piece in 1998 brushing aside fears of a stock market bubble and giving their reasons why the market could go much higher. The Dow then stood at 8,782.

A year later, they released “Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market,” which became a huge bestseller.

Most importantly, the authors suggested that the index would hit the magic number in about five years.

Believers threw every penny they had into the market; critics and doubters found the idea absurd at best.

The stock market itself weighed in shortly afterwards, bursting the internet bubble; many other events have also conspired to where it took 22 years for the Dow to finally be within striking distance of the forecast.

And that’s where the prediction went so wrong.

Bad forecasters never take the risk that Glassman and Hassett did; they give you a goal or a date, but never put the two together because that dramatically increases the chances of you being wrong.

If the authors hadn’t suggested that their prediction would come true soon, they wouldn’t have been the target of forecasting commentary for the past two decades.

That’s because there was something crucial that worked in the Dow 36,000 projection. In particular, it’s all the details that were lost when investors focused on the headline number as if it were gospel, before losing focus and faith as the market collapsed.

There’s a big difference between forecasting and advising, and what the authors suggested investors do boils down to buy a diversified stock portfolio and don’t put too much money in bonds.

Their thesis was that stocks would provide a much higher return than bonds over the long term, without incurring significantly greater risk.

That has turned out to be true.

Where the prediction went wrong is that the authors believed that once investors had the idea of ​​largely ignoring bonds to roll with stocks and get the bigger returns, the market would be pushed to new heights, quickly and forever.

And their long-term focus obscured what could happen in the short and medium term.

That’s not really a problem if you’re rich beyond your needs.

An investor with a multi-million dollar portfolio can see it halve from a big drop and still afford to be patient and wait for it to come back. An elderly person with modest savings doesn’t get the same comfort when their nestegg cracks and takes a decade or two to recover.

There are far more people who care about interim returns than there are who can afford to ignore them.

And this is where the bad forecast proves to be a good reminder for all investors; markets will rise and reward investors who build solid portfolios to overcome the hurdles.

In my opinion, the best stock market forecast ever—though we haven’t seen it come true yet—come from mutual fund pioneer Bill Berger, who forecast the Dow 116,200 in 2040. He made that appeal in a 1995 speech to a Society of American Business Editors and Writers— conference in Boston; the Dow was just above 4,300 at the time.

Berger did not predict a roaring bull market – even though the market was in the early stages of a market – nor did he suggest that no problems would come.

Instead, the 70-year-old founder of the Berger Funds (which closed shortly after his death a few years later) believed that the future would reflect a distant past rather than a recent past. The Dow was below 200 when Berger began asset management in 1950; if the future mirrored the past, mathematically speaking, the index would take the next 45 years to 116,200.

Berger wryly suggested that if the market didn’t hit the magic number by 2040, then people should seek him out and discuss it.

While 116,200 seems ridiculously far off — even if the Dow hits its much more famous forecast level of 36,000, consider this: an annual return of about 7% over the next 18 calendar years would make it happen.

What’s critical in assessing any forecast is how investors set expectations around them. Glassman and Hassett expected huge gains in the Dow, but they thought it would happen soon. Berger went even bigger, but approached it slowly.

The stock market is doing crazy things – the past 18 months have proven it both ways – but time calms that madness.

Investors should nurture expectations that keep them hopeful and satisfied, rather than fuel disappointment and weekly frustration that could cause them to change course and hunt for something better or different.

The mission of most investors is to capture the market trend throughout their lifetime; investors inspired by Dow 36,000 got there comfortably, even if it took longer than expected. People expecting a Dow 116,200 will get there too.

The next week, month, quarter, year, or half-decade isn’t all that important to someone who has a lifelong view of investing and shuts out the market noise.

For most investors, reaching a large target is the ultimate goal. Give it time, follow it and stay on course; if your best personal prediction is based on solid assumptions and reasonable numbers, you should reach the large numbers you need, and probably when you expect it to happen.