Will Dow 10000 turn out to be a long replay of Dow 1000?


This isn't the first time stocks have been stuck on a seemingly endless pogo-stick ride. On Jan. 18, 1966, the Dow hit an intraday high of 1000.50. It broke through the four-digit barrier three more times that January and February, then faded. The Dow cracked 1000 again in 1972 and 1976, then fell back both times. Not until December 1982 did the Dow finally hurdle above 1000 and stay there.

Wall Street veterans even coined a term for the market's behavior: "quadraphobia," or the fear of a four-digit closing value for the Dow.

Of course, financial history doesn't repeat itself—and even when it rhymes, the sounds can be almost unrecognizable. Inflation, at roughly 7% annually, was much higher from 1966 to 1982 than it is today, devouring all the return on stocks. And during the 1970s, according to an analysis for The Wall Street Journal by Wharton Research Data Services at the University of Pennsylvania, the Dow captured only about 15% of the total value of U.S. stocks, versus 30% today.

Still, a look back at Dow 1000 may still help us think a little more clearly about Dow 10000.

During the bull market of 1982 through 1999 that separated the two periods, computers and the Internet took off and interest rates fell. Those forces lowered the cost of research and development, enabling U.S. companies to innovate at a remarkable rate.

But, the Wharton research shows, the periods before and after that—Dow 1000 and Dow 10000—feature falling rates of corporate investment in innovation. During the Dow 1000 period, the stock market stagnated because the economy and most businesses were stagnating, too.

Yet investors, spoiled by the strong growth of the 1950s, had driven stock prices up to 18 times earnings at the beginning of Dow 1000. Likewise, in 1999, as the Dow crossed 10000, the price/earnings ratio of the market rose above 33—double its long-term average. High expectations are one of the main foundations of low returns.

Investors need to remember that stock markets can go nowhere for ages, as they did in the U.S. from 1929 to the end of World War II, in Germany from 1900 through 1957, and in Japan since 1989. In my view, it is likely that U.S. stocks and bonds will underperform their long-term average returns for years to come.

But as likely as that scenario is, it is far from certain.

Just when almost everyone had concluded that Treasury bonds had to lose value, they gained 3% in the past month alone.

And back in 1982, just as the index lifted its head above 1000, the Dow had plenty of doubters. One told the Journal, "Investors have begun a state of euphoria and complacency." Another dismissed "the likelihood of a sustained recovery any time in the foreseeable future."

While it could be years before the Dow rises durably past 10000, no one will see it coming when it comes. So, just as I wouldn't advise anyone to be 100% in stocks, I wouldn't advise most people to have 0% either. And I think it is imperative to have a third to half of your stock money outside the U.S., where other markets—and currencies—may do better.

In November 1963, with the Dow at 740, the great investor Benjamin Graham declared that "in my nearly 50 years of experience in Wall Street, I've found that I know less and less about what the stock market is going to do but I know more and more about what investors ought to do."

Graham went on to counsel that investors should never have less than 25% or more than 75% of their money in the stock market—and that they should move toward the maximum as the market falls and toward the minimum as it rises. In late 1964, with the Dow just below 900, he advised keeping no more than 50% in stocks, and he reiterated that sentiment eight years later. My hunch is that he would probably say much the same around Dow 10000 as he did around Dow 1000.

Write to Jason Zweig at intelligentinvestor@wsj.com