In the period from 1920 to 1989, the Dow Jones Industrial Average would consistently be undervalued or overvalued at set Altimeter levels (15 and 30, respectively). An investor could almost count on these general points to accumulate and sell stocks without fail. Note the various dates when a “sell” or “buy” indication was given. All points until after 1987 were useful indications for market under or over valuation.
After 1987, the Altimeter for the Dow Jones Industrial Average started to change. What has changed that made the Altimeter vary so much from the normal levels? We think it has to do with the selection of companies that are included in the Dow Jones Industrial Average with less of an emphasis on dividend payments, lower dividend yields and lower relative payout ratios. In addition, inclusion of companies like Visa, Apple, Microsoft, Intel and Cisco Systems has shifted the course of the index which might more appropriately reflect the changing nature of the U.S. economy, as seen in the chart below.
In the chart, we have outlined where the Dow Jones Industrial Average would be if the Altimeter were at the respective levels. The 68.22 point represents the highest ratio registered in the Altimeter back in 2000. The next level, “Dow at 29,554,” is merely a splitting of the difference between the 68.22 and 47.37 points. the 47.37 and 35.93 levels are what we believe are the “new normal” high and low range for the Altimeter going forward. Finally, the “Dow at 12,068” level is based on the 2009 low. We don’t split the difference on the meltdowns because they happen much faster than when the market goes up.
The dividend yields based on the Dow Jones Industrial Average Altimeter are as follows:
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1.46% at 34,885
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1.73% at 29,554
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2.11% at 24,223
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2.78% at 18,373
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4.23% at 12,068
Tentatively, based on the Altimeter, The Dow Jones Industrial Average has short-term upside targets of 24,049.73 and 24,223.59. These appear to be reasonable levels of expectation based on the peaks in the Altimeter that were achieved in 2007 and 2015.
Already, the Altimeter has stalled at the 47.03 level, failing to exceed the prior peak in 2007 at 47.37. It would be a considerable sign of market conditions if the Altimeter is unable to exceed, by a substantial margin, the 48 level. If a failure occurs, our downside target would be 41.50 or Dow 21,219.29, en route to the 18,373 level.
Now, to address the elephant in the room. How in the world do we believe that an already “overvalued” market can possibly go as high as 34,885? We don’t believe it at all, instead, we’re going by the precedent of the the extensive history of the stock market in the United States. In our latest article titled “Bull Market Ranking” we show that the stock market has had the capacity to achieves these lofty heights, in spite of the fits and starts along the way.
To put this thought into perspective, if the Dow achieved the remaining bull market gains after the respective declines of 1852, 1923, 1929 and 1987, we see the Dow Jones Industrial Average climb to the following levels:
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1852 gain of +284% equals a Dow of 24,844.60
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1923 gain of +338% equals a Dow of 28,338.38
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1929 gain of +352% equals a Dow of 29,244.17
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1987 gain of +589% equals a Dow of 44,577.95
These aren’t wishes on our part, just a rehashing of what the market is capable of with or without a Federal Reserve Bank.