Finally, on the Brink of Dow 36,000

In early 1998, my American EnterpriseInstitute colleague Kevin Hassett, a well-credentialed academic who would later become chairman of the Council of Economic Advisers during the Trump administration, came to me with an idea. Over the previous three-fourths of a century, stocks had returned an annual average of about 11% and government bonds 5.5%.

- James K. Glassman

Yet over the long run, stocks were no more risky than bonds—a phenomenon that economist Jeremy Siegel had demonstrated in his 1994 classic, Stocks for the Long Run. “It is very significant,” Siegel wrote, “that stocks, in contrast to bonds or bills, have never delivered to investors a negative real return over periods lasting 17 years or more.”

In other words, stocks carried a big premium compared with bonds to compensate investors for the extra risk they were taking, but there was no extra risk!

This paradox is called the equity premium puzzle, and Kevin and I believed that people were solving the conundrum by bidding up the prices of stocks to their proper level. Higher prices today mean lower future returns, allowing the two asset classes to reach a logical equilibrium.

The road to 36,000. We went public with our insight in an op-ed that the Wall Street Journal published on March 3, 1998, with the headline, “Are Stocks Overvalued? Not a Chance.” At the time, the Dow Jones industrial average was 8782. We suggested, with many caveats, that the Dow ought to be 35,000. A year and a half later, with a few adjustments, our thesis became a book called Dow 36,000. As for the Dow itself, well, it has taken longer than we thought to reach the magic number, but arrival seems imminent with just 6.5% to go as of April 9.