The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
By David Sterman NEW YORK (
StreetAuthority) -- Back in January 2000, the
Dow Jones Industrial Average came within 100 hundred points of the 12,000 mark.
The subsequent recession knocked the index back a notch, and it wouldn't be able to breach the 12,000 level until October 2006 -- more than six years later. Dow 13,000 would arrive by the following spring, and by that fall, the index surpassed 14,000.
It would eventually fall by half. And five years later, we're still trying to get back to Dow 14,000.
I've recently been writing that the stock market
may be due for a breather after a strong three-year run, but that could well be the pause that refreshes a longer-term rally.
The stars are aligning for the Dow to finally breach that 14,000 level and perhaps move up to the 20,000 mark within the next three years, which is why I am looking at any possible market pullback as a chance to reload on appealing stocks before the next upward move. You should, too.
Not a Phantom Target
To be sure, I'm instinctively leery of lofty price targets that are issued just to get attention. For example, a few analysts recently predicted that
Priceline.com (
PCLN) could hit $1,000. An especially media-savvy analyst just issued a report on
Apple (
AAPL) with a $1,001 price target. I suppose he wins some sort of prize.
So I'm not talking about Dow 20,000 to get your attention, but to lay out the scenario in which we may get there. I don't need to run through all the reasons we may not get there: From crippling budget deficits to volatile oil-producing nations to a good old-fashioned spike in inflation, there's plenty that could go wrong. But there's even more that could go right.
Of course, it all starts with profits, and what investors determine to be an appropriate valuation on those profits. As I
recently discussed, profit margins have likely peaked, as the era of cost cuts has ended.
But that isn't necessarily a bad thing. A slowly improving economy leads companies to start boosting spending in areas of the business that possess strong growth prospects. Their investments in personnel, technology, new factories and stepped-up product research can strongly stimulate economic spending.
History Could Repeat Itself
This was precisely the backdrop that was in place in 1995: Steadily rising corporate spending created a virtuous cycle that rippled throughout the economy. Corporate plans put in place in 1995 led to a profit -- and stock market -- surge in 1997, 1998 and 1999. In effect, the business cycle takes time to develop and only builds a head of steam after a while.
