8 Ways the Dow Can Climb Past 14000

Douglas McIntyre 24/7 Wall Street November 8, 2010

Posted: November 8, 2010 at 4:24 am

It may feel like it was a generation ago when the Dow Jones Industrial Average reached its all-time high of 14,198.10. But that was almost three years ago – October 11, 2007. The index then dropped to 6,469.95 on March 6th 2009, due to a combination of the credit crisis and the depths of the recession.

It has risen 77% since then to the current level of 11,444. It would need to rise another 23% to move back above 14,000.

The 14,000 level is attainable in the next year or two if a small number of things happened. A longer recession would clearly bring the DJIA down. So might a prolonged period of unemployment near 10% or another drop in the home market.

However, instead of everything going wrong as in 2008 and 2009, most things in the financial markets may be going right.

There are relatively few changes to the current economy that would have to occur for the DJIA to move higher than it is now. Several of these would have to happen in tandem, but when the financial world improves, it is often because a number of things occur simultaneously.

1. Earnings per share are relatively cheap now.

That is only accurate if the revenue of large public companies rise or costs can be bought down more. Both may happen. Worker productivity improved 1.9% in the third quarter of this year. It has moved up most quarters for the last two years. American businesses seem to be able to squeeze more work out of each employee. There is clearly a limit to this, but it may not have been reached yet. Company margins, particularly work force ratios, could still get better, and so could sales. The forecasts that many companies put out for the current quarter and next year projected fairly robust growth. This is not only true for firms like Google and Apple. For example, Ford expects sales to get better. So do companies as diverse as GE, Pfizer, AT&T, Alcoa and Boston Scientific. The final aspect of the EPS formula is that the nation's largest companies have hundreds of billions of dollars on their books. Some, such as McDonald's, are aggressively buying back stock"”making their numbers of shares outstanding shrink.

2. QE2 could work.

The Fed’s purchase of $600 billion or more in long-term US Treasuries should bring other interest rates down. It is also likely to weaken the dollar and improve US export levels, which a number of America's trade partners find objectionable. The newest round of quantitative easing should push down interest rates and the amount of capital banks have to lend at lower interest rates. Interest rates are already at historic lows and the economy has not been helped much, but they eventually will be low enough to encourage borrowing – a key element to economic growth.

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8 Ways the Dow Can Climb Past 14000

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