How High Can the Dow Go? Here's History's Answer.
The Dow Jones Industrials have repeatedly set record highs for months, and investors who are nervous about being in uncharted territory keep thinking that the average is overextended and therefore due for a pullback. Yet some more bullish investors believe that the stock market has plenty of upside potential left. Who's right?
Obviously, it's impossible to know for sure how high the Dow could go during this bull market. But by looking at what's happened during similar periods in history, we can at least get a hint of what's probable this time around. With that in mind, let's turn back the clock and look at the last time we were in a situation in which the Dow repeatedly set new records.
Bouncing back from the tech bust
On Jan. 14, 2000, the Dow set a closing high of 11,723. It would prove to be the last gasp of the bull market of the late 1990s, as the tech boom turned to bust, and the terrorist attacks of Sept. 11 would kick the U.S. economy while it was down and extend losses for another year or so. By 2002, the market hit bottom and started to climb. Yet it would be four more years before the Dow was able to regain all of its lost ground and approach its old record highs.
On Oct. 3, 2006, the Dow finally closed above its 2000 highs, and at the time, it seemed like a fitting end to a tough period for the stock market. In the roughly four years since the market had hit bottom in late 2002, the Dow had soared more than 60%, and some investors believed that having posted such strong gains, further advances for the market were unlikely.
Months passed, and the Dow kept hitting new highs, topping the 12,000 mark for the first time just a couple of weeks after its first record high in six years and climbing above 13,000 six months later. In the end, the Dow extended its bull market for more than a year after its initial new record, closing at 14,164 on Oct. 9, 2007, in what would be its last record high before the financial crisis hit.
History hasn't exactly repeated during this bull market, but there are some similarities. Stocks took four years from their lows to recover their former highs, with the Dow topping its 2007 highs for the first time back on March 5. Since then, the market has gone on to eclipse new milestones, topping 15,000 for the first time just a couple of months after that first high and moving successively higher. And once again, skeptical investors are calling for a pullback.
Yet based on its 2006-2007 experience, the Dow could keep climbing until next March. Moreover, if its gain of 21% between the time it hit its first new record in 2006 and when it reached its October 2007 top repeats this time around, the Dow could climb above 17,000.
Don't abandon hope
With markets hitting new records on an almost daily basis lately, it's tempting to adopt a fatalistic attitude that the market will eventually have to fall back from its current heights. Yet while that's almost certainly true in the long run, bull markets can go on longer than anyone would expect. Be sure you're prepared for anything -- but also make sure that "anything" includes further gains in the stocks you own.
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The article How High Can the Dow Go? Here's History's Answer. originally appeared on Fool.com.
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