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Outlook for the Dow

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by Peter Switzer

There are two headlines that will always get me in. The first says something like — 'The Dow to drop 1000 points!' The other comes from the law of opposites and therefore would look like — 'The Dow to add 1000 points'.

That’s why I could not resist CNBC when it screamed — 'Dow Headed to 12,000 after 'Brief Hiatus'?'

Of course, I didn’t instantly see the question mark at the end of the headline but the guts of the story I had to read.

The making of the yarn came out of an interview with Jim Hardesty, president of Hardesty Capital Management, and Doug Cliggott, US equity strategist at Credit Suisse.

Two points

Hardesty told the US business TV channel that he reckons the Dow Jones is only “stalled” but was set to head towards the 12,000-level by the end of this year.

His two main points which I can’t argue with were that the US economy is recovering and share prices or market valuations don’t accurately reflect potential earnings.

It’s simple stuff. If you believe in the recovery story, share prices head up and vice versa. That’s why I do a daily health check on the US economy.

Need a reason

Hardesty says we’re in a brief hiatus. I argue that investors just want to see a big reason to be really optimistic. The two biggies get down to — a noticeable improvement in the US housing sector and a more resilient consumer. The latter is progressing better than the former but both are not convincing.

Hardesty also believes that the Dow will beat its old peak of 14,164 by 2012. Doing the maths and that’s 32 per cent in two or so years. And it implies 12 per cent or more between now and New Year’s eve, if he is right.

Typically, the other guy Cliggott had a less optimistic crystal ball but he was a cautious optimist arguing that merger and acquisitions in biotech, and the energy sector were going to be the sectors to be in.

Stocks exposure

The reality is that if the Dow can do 12 per cent for the rest of this year, and lots of analysts would agree with Hardesty and it did another 12 per cent the year after, rather than his tip of around 20 per cent, then it still builds a great case to have an exposure to stocks.

The bottom line is that economists, analysts and investors with damn good crystal balls are always the people I want to listen to.

Green shoots

By the way, it was a year ago that Ben Bernanke, the boss of the US Federal Reserve, first referred to “green shoots”, referring to signs that the US economy was growing. He was criticized by some smarties with the green shoots compared to dying weeds.

He was right and they were wrong. Sure, we would love for the US greenery to be more fast-growing, but never forget how bad our economic future looked in 2008. Even in early 2009 most economists in this country thought unemployment was heading to over 8 per cent but it peaked at 5.8 per cent.

Never forget that — we got off pretty well scot-free, considering how bad it all could have been.

For advice you can trust, contact Switzer Financial Services.

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Published on: Wednesday, March 17, 2010