How Much Higher Can the Market Go

Mr. Glassman, formerly a columnist for the Washington Post, and Mr. (Kevin A.) Hassett, a resident economist at the American Enterprise Institute, put forth a controversial thesis: Stocks today are not overpriced as a result of irrational exuberance; rather they are enormously underpriced by a facto...

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Bibliographic Details
Published inWall Street Journal
Main Author By Burton G. Malkiel
Format Book Review
LanguageEnglish
Published New York, N.Y Dow Jones & Company Inc 22.09.1999
EditionEastern edition
Subjects
American dollar
Books-titles
Dividends
Dow Jones averages
Economists
Equity
Glassman, James
Government bonds
Growth rate
Hassett, Kevin
Investments
Nonfiction
Risk premiums
Securities markets
Stock exchanges
Zero coupon bonds
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Summary:Mr. Glassman, formerly a columnist for the Washington Post, and Mr. (Kevin A.) Hassett, a resident economist at the American Enterprise Institute, put forth a controversial thesis: Stocks today are not overpriced as a result of irrational exuberance; rather they are enormously underpriced by a factor of three or four. A "perfectly reasonable price" for the Dow Jones Industrial Average is 36,000 -- not 10 years from now but today. Investors who failed to take advantage of recent gains should jump in now -- the best is yet to come, and it will happen soon. The (James K.) Glassman-Hassett thesis is easily described. Over the past 75 years, common stocks have provided investors with average annual returns of about 11% a year, including dividends and capital gains. Government bonds have returned only about 5.5% a year. The extra 5.5 percentage points of returns from owning stocks over bonds (referred to as the equity risk premium) is unjustified. Over the long run, the authors argue, the riskiness of stocks (as measured by the dispersion of long-run, say 20-year, returns) is no greater than the riskiness of bonds or Treasury bills similarly measured. Hence stocks must rise to reduce their future returns and thereby eliminate unwarranted risk premiums. Some of the recent rise in the stock market reflects the beginning of that adjustment. But the adjustment will only be complete -- Messrs. Glassman and Hassett believe -- when stocks and bonds are priced to offer equivalent returns, and that implies a level of 36,000 for the Dow today with a price-earnings multiple of 100.
ISSN:0099-9660