Now that the Dow Jones industrial average has crossed the 10,000 mark, optimistic investors may be thinking it will not be long before the market recaptures the highs it hit in 2000.
If history is any guide, investors should keep their enthusiasm in check. Over the past century, when the market has reached the heights it did in 2000, it has taken a long time–sometimes more than 20 years–for stock prices to regain the old peaks.
“At the top, investors are willing to pay high prices for hopes,” said John Dorfman, a money manager based in Newton, Mass. When stock prices tumble, said Dorfman, investors get more skeptical about the future, and that skepticism translates into depressed stock prices, often for extended periods
Dorfman and others think it is possible the Dow could reach its old high of 11,723, reached in January 2000, within a few years. They suggest it could take several years longer for the Standard & Poor’s 500 index to equal its high mark of 1527, reached in March 2000. The S&P closed Friday at 1074.
When it comes to the Nasdaq composite index, which is primarily made up of technology stocks, the target date moves further into the future. The Nasdaq closed Friday at 1949. In March 2000 it topped out at 5048.
“We won’t be there for 10 to 20 years,” said Thomas O’Neill, a longtime Boston money manager, echoing a widely held belief among investment professionals.
The history of stock market peaks is laid out in gloomy detail in “Irrational Exuberance,” a book by Yale economics professor Robert Shiller published in 2000. At three points in the past–1906, 1929 and 1966–the Dow peaked after long bull markets. At all three peaks the market’s price-earnings ratio hit levels far above historical norms.
In 1906, investors were excited about prospects for a new century and the new technology that was transforming America. With the benefit of hindsight, it is clear 1906 was a terrible time to put money in the market. It took another 10 years for the market to reach its 1906 high of 103.
The next peak came in 1929 at the end of the Roaring ’20s. The bull market of the 1920s was followed by a crash and the Great Depression. The stock market did not regain its old highs until 1955.
The third peak came in 1966, another market that was carried along by excitement about the economy and technology. Though it moved higher in the 1970s, it took until 1982 for the stock market to move decisively above its 1966 mark.
Most money managers say that talking about the stock market as one entity today can be misleading. They say that at the height of the bull market in 2000, many so-called old economy stocks were trading at modest prices. It was technology stocks, especially the new, unproven technology firms, that reached nosebleed levels.
That split suggests to some managers that the Dow and the S&P 500, which are not dominated by technology stocks, could pass old highs within years, not decades. The Dow would need to rise 17 percent to reach its old peak; the S&P would have to climb 42 percent. By contrast, the Nasdaq would have to rise another 159 percent.
“People enjoyed their date with the prom queen so much they would like to repeat the experience,” said Dorfman, recalling the giddy feeling investors had about tech stocks in 2000. Dorfman’s advice: Don’t expect another date any time soon.
“The old Nasdaq peak could be 15 years away,” he said.
