Dow rally peak? Don't count out Dow 30,000

Adam Shell | USA TODAY

Show Caption Hide Caption Dow closes above 24,000 The blue chip index broke through the 24,000 milestone for the first time Thursday. The Dow and Nasdaq closed at record highs. Fred Katayama reports. Video provided by Reuters

The Dow’s milestone mania may have more room to run.

After topping 24,000 last week and briefly surging more than 300 points Monday on optimism that a tax overhaul plan is moving closer to reality after the Senate passed a bill over the weekend, Wall Street bulls say Dow "25K" is pretty much a sure thing.

But the rally, they say, likely won't stop there.

The skyrocketing blue-chip stock gauge might not stop going up until headlines trumpet Dow 30,000, bulls say. And Dow "30K" — an additional 23.5% gain from Monday's close of 24,290 — is not an unthinkable level to attain before the average peaks and enters the next bear market, or protracted decline of 20% or more.

The Dow this year has barreled through 20,000 and four other 1,000-point milestones on its way to 64 record highs.

“This rally looks bulletproof because every area of the economy is seeing gains,” says Chris Rupkey, chief financial economist at MUFG, a New York-based bank. “Twenty-five thousand is too close and no one sees that as a ceiling. Thirty thousand may be more likely as a stopping point.”

Milestone Mania

If the Dow's performance in 2018 is similar to its year-to-date gain of 23%, it could reach 30,000 next year. If the market matches its long-term average annual gain of around 10%, however, it would surpass 30K sometime in 2020.

The Dow jumped 302 points Monday to an intraday record of 24,534.04 before closing up 58 points as investors' moods got a boost from movement on tax cuts.

The hopes for sizable tax reductions for American corporations have been a main pillar of Wall Street's bullish view of stocks this year and next. The Senate bill slashes the corporate tax rate to 20% from 35%. The final tax bill still needs to be ironed out by the House and Senate.

Last week, however, ended on a volatile note as political risk jumped after President Trump's former national security adviser, Michael Flynn, pleaded guilty to lying to the FBI and said he was cooperating with prosecutors in the probe related to Russia's meddling in the U.S. presidential election. The news created fresh political uncertainty and raised fresh questions as to the Trump campaign's ties to Russia.

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Bearish investors warn of turbulence ahead, citing pricey stocks, the expectation for higher rates and early signs of irrational exuberance.

The Path to Dow 30,000

But the Dow's latest rally could be a sign of things to come, bulls counter.

The path to Dow 30,000, Rupkey says, will be driven by successful Dow components such as Boeing, UnitedHealth, 3M, Apple, McDonald's, Caterpillar and Home Depot — companies which have strong earnings potential as the U.S. economy gains momentum.

“We aren't talking Bitcoin here,” says Rupkey, referring to the highly volatile and speculative digital currency that has rallied roughly 1,000% this year. “This handful of companies driving the rally this year are the heart of America. Betting against the economy is a fool's bet.”

Getting to 30,000 before the next bear market is “a pretty tall order, but one I think we can achieve,” adds Chris Zaccarelli, chief Investment officer at Charlotte-based Independent Advisor Alliance.

The Dow would have to fall to 19,432 from Monday's close to enter a bear market.

Zaccarelli’s optimism that the Dow can gain another 5,700 points before major trouble strikes is based on his belief that a recession — a typical bull market killer — is far off. The economic recovery that is gaining traction around the world, he says, will extend the life of the current U.S. recovery, which began in June 2009. He won't rule out a steep pullback along the way, however.

It’s hard to get too negative about a market that doesn’t yet face the headwinds of fast-rising interest rates or signs of global economic weakness, adds Bill Stone, chief investment strategist at PNC Asset Management Group.

Stone says stocks are expensive on a historical basis but remain attractive given the low interest rate environment.

And as Monday's Dow surge illustrates, stocks could also get a lift from corporate tax cuts. If companies pay less in taxes, it will free up cash for them to make acquisitions, buy back company stock, invest more in their businesses or return money to shareholders via dividends. Credit Suisse estimates that a 20% tax rate for corporations would boost the overall S&P 500 stock index's earnings by 10% in 2018.

"Dow 30K is certainly possible before a bear market," Stone says.

Skeptic: Slim Chance of Dow 30K

But not everyone on Wall Street thinks the Dow will go up that much.

Citing the Dow’s big gains this year, Joe Quinlan, chief market strategist at U.S. Trust in New York, says a breather for stocks would not be surprising.

He says the Dow’s high point “before this rally peters out” will be around 26,500, or about 2,200 points, or 9% higher. The Dow will run into headwinds, Quinlan says, perhaps in as early as the middle of next year, when growth overseas accelerates, causing weakness in the U.S. dollar to dissipate.

A stronger dollar poses a threat to Dow companies that do a lot of business abroad, as their products are more expensive when bought with weaker foreign currencies, causing sales and profits to decrease.

At the moment, more bullish Rupkey says he sees little reason why stocks should tank.

“A bear market drop of 20% is hard to imagine,” he says. It will take more than a geopolitical shock, such as a missile strike from North Korea or a major trade disruption or a downturn in China to send the Dow into a downward spiral, he argues.

“I don't see a good old-fashioned 20% bear market drop unless the economy does an about-face and actually turns down, and right now the risks of recession are minimal," Rupkey says.

"Until then," he adds, "the stock market can party (until) 25,000 or 30,000 or something higher.”