Dow 35,000 was a dream in the go-go 1990’s when the new economy had supposedly broken all of the old rules.  Dow 3,500 was a distinct fear in March, 2009 when stocks had fallen by more than half from their peak.  Dow 10,000 is the most visible reference point in the current stock market.

Every investor and business degree holder knows that stock values are fundamentally based on the expected risk-adjusted net present value of future after-tax cash flows.  They are also tempted by the “efficient markets hypothesis” that says that stock valuations incorporate all information about future returns and therefore set the present value in a rational manner.  On the other hand, they understand fluctuations, random walks, animal spirits and the history of under and over valued stock markets.

http://stockcharts.com/charts/historical/djia1900.html

http://www.investorsfriend.com/return_versus_gdp.htm

Individuals who believe that stocks return 7-8% on average in the long-run through 2-4% dividend yields and 4-6% price increases, must conclude that the stock market is inherently irrational.  It has been 30% undervalued or overvalued a majority of the last 100 years.  Overvalued 1922-31.  Undervalued 1932-54, except for 1936-37.  Undervalued 1974-86.  Overvalued 1996-2008. 

Stocks were overvalued by 137% in 1929 before tumbling to -67% undervalued in 1933.  Stocks reached an undervaluated low of -58% in 1942.  Stocks reached a new -50% undervaluation during the depths of the 1982 recession.  In 15 short years, by 1997, they reached a 57% overvaluation.  They rose to 115% overvalued in 2000, before retreating to a mere 38% overvaluation in 2003.  In 2008, stocks were 67% overvalued compared with the long-run trends.

Based on 100 years of history, the Dow Jones Industrial Average at the end of 2010 should be 9,000.  The expected value in 2020 is 15,700, providing a 5% annual valuation return and 2% dividend return.  Investors who bet against long-term average valuations do so at their own risk.

Year	Trend	Actual	+/-
1910	50	62	24%
1911	53	60	14%
1912	55	60	9%
1913	58	60	4%
1914	61	58	-5%
1915	64	56	-12%
1916	67	80	19%
1917	70	80	14%
1918	74	70	-5%
1919	78	75	-3%
1920	82	100	23%
1921	86	70	-18%
1922	90	80	-11%
1923	94	90	-5%
1924	99	85	-14%
1925	104	100	-4%
1926	109	130	19%
1927	115	140	22%
1928	121	190	58%
1929	127	300	137%
1930	133	250	88%
1931	139	190	36%
1932	146	80	-45%
1933	154	50	-67%
1934	161	90	-44%
1935	170	90	-47%
1936	178	130	-27%
1937	187	175	-6%
1938	196	100	-49%
1939	206	130	-37%
1940	216	125	-42%
1941	227	125	-45%
1942	239	100	-58%
1943	250	125	-50%
1944	263	130	-51%
1945	276	160	-42%
1946	290	200	-31%
1947	304	170	-44%
1948	320	170	-47%
1949	336	175	-48%
1950	352	200	-43%
1951	370	250	-32%
1952	388	260	-33%
1953	408	260	-36%
1954	428	260	-39%
1955	450	380	-15%
1956	472	500	6%
1957	496	500	1%
1958	521	475	-9%
1959	547	525	-4%
1960	574	600	5%
1961	603	580	-4%
1962	633	700	11%
1963	664	550	-17%
1964	697	750	8%
1965	732	900	23%
1966	769	950	24%
1967	807	850	5%
1968	848	900	6%
1969	890	950	7%
1970	935	800	-14%
1971	981	850	-13%
1972	1,030	900	-13%
1973	1,082	1000	-8%
1974	1,136	850	-25%
1975	1,193	700	-41%
1976	1,252	850	-32%
1977	1,315	1000	-24%
1978	1,381	850	-38%
1979	1,450	850	-41%
1980	1,522	850	-44%
1981	1,614	950	-41%
1982	1,710	850	-50%
1983	1,813	1000	-45%
1984	1,922	1200	-38%
1985	2,037	1200	-41%
1986	2,159	1300	-40%
1987	2,289	1900	-17%
1988	2,426	1900	-22%
1989	2,572	2100	-18%
1990	2,726	2600	-5%
1991	2,890	2500	-13%
1992	3,063	3000	-2%
1993	3,247	3300	2%
1994	3,442	3700	8%
1995	3,648	3800	4%
1996	3,867	5000	29%
1997	4,099	6500	59%
1998	4,345	7800	80%
1999	4,606	9000	95%
2000	4,882	10500	115%
2001	5,175	10000	93%
2002	5,485	10000	82%
2003	5,815	8000	38%
2004	6,163	9500	54%
2005	6,533	10500	61%
2006	6,925	11000	59%
2007	7,341	12000	63%
2008	7,781	13000	67%
2009	8,248	7000	-15%
2010	8,743	10000	14%
2011	9,268
2012	9,824
2013	10,413
2014	11,038
2015	11,700
2016	12,402
2017	13,146
2018	13,935
2019	14,771
2020	15,657