Why this Ivy League Professor Sees Dow Hitting 18,000

The bears predicting a stock market crash have it all wrong.

So says Jeremy Siegel, finance professor at the University of Pennsylvania's Wharton School and author of "Stocks for the Long Run." He predicts the Dow - which closed yesterday (Wednesday) at a new record high 14,455.28 - will continue the bull market run, ending this year in the 16,000 to 17,000 range.

For 2014, he says, the "best bet goal" is the Dow will climb to 18,000.

And the well-known bull has nearly 150 years of data to back up his bold prediction.

Here's why Siegel is so bullish.  

The Numbers Behind Siegel's Bull Market Target

Siegel - with help from Jeremy Schwartz, a former student of Siegel's and now the research director at WisdomTree Asset Management - used data dating to 1871 to analyze the returns of the Dow based on rolling cycles of two, five, 20 and 30 years.

In all of the 20 and 30-year cycles the average annual return was always positive, but some five-and two-year cycles have had negative average annual returns. In order to reach average positive returns for the 20 and 30-year cycles, it's clear the below-average short-term periods were followed by above-average returns.

Digging deeper into the numbers, Siegel found that five-year cycles of negative returns have normally been followed by two years of positive returns.

The five-year return through March 5, 2013, falls into the lowest third of all returns of five-year cycles that were analyzed.

The median annual return on the 45 two-year periods following the five-year periods of the biggest declines was 14.59%.

Based on this pattern, Siegel applied that 14.59% to 14,254, where the Dow closed March 5, and - voila! - the Dow reaches 18,000 before the end of 2014.

With the market trading around 14,500, "15,000 by year-end looks pretty easy now," observed Siegel, "with 16,000-17,000 within range by the end of the year."

Criticism of Siegel's Work

Siegel bases much of his work on the 20th century, which was the most economically successful century in U.S. history.

Critics say that success will be difficult to repeat this century and point to the past decade as evidence that the past will no longer be a reliable indicator for future stock market returns.

In addition, many believe the market is at its current level largely because of the U.S. Federal Reserve's actions during the past few years.

But Siegel insists the "great rotation" out of bonds and into stocks is in its infancy.

He notes Americans are sitting on $11 trillion in savings accounts earning next to nothing.

Siegel believes retail investors, fed up with zero percent returns, are now starting to re-enter the market. And a return of consumer confidence and continued improvement in housing will also strengthen the economic recovery in the second half of 2013, sending stocks higher, according to Siegel.

"We certainly can improve our economy, we are still operating well below our potential," Siegel said on FOX Business. "We have unused capacity and we can have more demand without overheating this economy."

But investors shouldn't jump blindly into stocks assuming we have entered a new secular bull market in which returns will be easy to come by.

That's why you need to have a sound investment plan like the 50-40-10 strategy Money Morning Chief Investment Strategist Keith Fitz-Gerald advises investors to use for the best profits, protection and potential.

For example, it incorporates solid "glocal" companies that have global brands and a highly localized presence, as well as investment tools like trailing stops, inverse funds and much more.

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