Long-term forecasts are easier to make than short-term forecasts.
Tomorrow, for example, there is a 50% probability of a gain in the Dow Jones Industrial Average. The daily close is a response to news, and day-to-day news is unpredictable.
Long-term trends depend on economic growth rather than news. Economic growth depends on population trends and changes in productivity. Population trends are known decades in advance.
From now until 2050, population trends point to a strong bull market in stocks. In about 30 years, the Dow should top 121,000.
That’s a level that seems unimaginable right now. But it’s a level that assures millennials who save even small amounts can build a retirement nest egg.
The chart below explains why the Dow will gain more than 370%.
There’s a labor shortage, according to Census data. This is the third one in the past hundred years.
History shows bull markets coincide with labor shortages. This might sound wrong. But the data shows bull markets unfold when there’s a shortage of labor.
A shortage in labor leads to higher wages. The higher wages increase consumer spending and confidence. That boosts stock prices.
Strong Bull Markets
You can see in the chart above that previous labor shortages led to strong bull markets.
From 1948 through 1967, stocks delivered an average annual return of 9.8%, excluding dividends. With dividends, gains averaged 14.6% a year.
The labor shortage of the 1990s was even better for investors. Gains averaged 18% a year without dividends, and more than 20.8% a year with dividends.
Looking ahead, we are unlikely to see gains like that in the next few decades. Dividends are low, which will hold down total returns. Economic growth is unlikely to be as strong as it was in the earlier time periods.
Small Gains Are All We Need
Right now, economic productivity growth is slower than average. There’s no single reason for that. But large gains in transportation and technology boosted productivity in the earlier labor shortages.
Some analysts believe technological changes are near. Maybe driverless cars will boost productivity. Or some other great leap will occur. These analysts are looking for “big bang” changes to boost the economy.
That won’t happen, but small gains are all we need.
For example, Sherwin-Williams created new paints that dry at temperatures as low as 35 degrees. That’s 15 degrees less than the temperature needed for other products. This means homebuilders can stay busy even in the winter.
Small gains like that add up over time. They boost productivity and wages. Large paychecks boost spending and stock prices.
We may not see 20%-a-year gains like we did in the 1990s. But we don’t need to see that for the Dow to rise.
Being conservative, if returns average 5% a year, the Dow would reach 121,087, a gain of more than 370% from its current level.
Michael Carr, CMT
Editor, Peak Velocity Trader