By David Rogers. BLOWING ROCK, N.C. — The equity markets remained somewhat buoyed by promises of some sort of resolution to the Iran conflict/war. That said, we are at the top of my Dynamic Trading Channel with deteriorating breadth, so we must take a cautious approach in investing for the intermediate-term, fearful of a significant pullback or, at the very least, an extended period of market consolidation.
Long-term, we remain optimistic that within 10-15 years the Dow Industrials will be at 100,000, as previously published near the bottom of the last intermediate-term correction in April of 2025 (DJI: 37,000) and, prior to that, near the bottom of the intermediate-term correction in September 2022 (DJI: 29,000).
Recall that when the DJI was touching 6700 in early March 2009, we wrote that within 10-15 years the DJI would reach 30,000. With some short- and intermediate-term hiccups along the way, it made that goal in roughly 11 months (December 2020).
Our rationale for higher prices, regardless of who is in the White House, is based on three basic inputs: inflation, the reinvestment of corporate earnings after paying taxes and distributing dividends, and a survivorship bias in the indices.
There is a sort of compounding intrinsic growth in the aggregate value of the Dow 30 with the reinvestment of corporate earnings after taxes and dividends. When you add in the inflation component, those values get magnified. At any given point in time, the market tends to apply standardized multiples to equity valuations, i.e. 10x earnings. They may be cheaper dollars 10-15 years out, but the same level of business activity that produced $1.00 per share in earnings 15 years ago may be producing $3.00 per share today. The actual health of a company may be no better, perhaps even worse, but inflation is a catalyst for increased absolute dollars per share. So a company that earned $1 per share 15 years ago might well be earning $3.00 per share today with no significant improvement in operations. A 10x earnings multiple 15 years ago implies a $10 stock. That same 10x multiple today against $3.00 per share implies a $30 stock.
When you add in the fact that the folks managing the market averages or indices tend to throw out badly performing companies from time to time and replace them with better performing companies, that’s where the survivorship bias comes in — tending to push the averages even higher.
That is a brief explanation of our bullish long-term reasoning, but from time to time the market can get a little overdone. This is one of those moments, suggested in our market studies. Reaching the upper band of our Dynamic Trading Channel produces an intermediate-term sell signal in our studies when accompanied by deteriorating market breadth. In our view, the market simply needs to “correct,” intermediate-term.
Market corrections generally take on some combination of severe price decline OR sideways consolidation over time. For now, we suspect the upside is somewhat limited, with the higher risk of adverse price action. At best, we see a period of consolidation.
Either way, we are looking to hedge portfolios — especially with this president at the helm, steering the ship. He makes everything unpredictable, taking a chain saw to a problem instead of the scalpel that is needed. We’ve seen it in tariffs, immigration, and government spending, as well as in Iran and Venezuela. When you add in off-the-cuff social media statements about taking over Greenland, putting his name on everything that comes to mind, firing qualified people and replacing them with “yes” minions, and wanting to prosecute anyone who dares to challenge him. As a politician, he deserves an “F” grade in getting on the wrong side of 50+ million baptized Catholics in the U.S. by insulting the Pope.
One could easily say that Donald Trump and Pete Hegseth underestimated Iran, which now — even with a weakened military — has a stronger position than when the war began because of its sway over the Strait of Hormuz and the energy-dependent world. The only “out” seems to be to commit potential war crimes (“wipe out a civilization” or “shoot to kill Iran gunboats operating in the Strait of Hormuz”) and to curry the disfavor of most Americans and the rest of the world. Either that, or tuck tail and withdraw.
However laudable his goals might be, we question Trump’s chaotic execution.
DISCLAIMER: The information provided in this publication is for informational and educational purposes only and does not constitute investment advice, financial advice, or a recommendation to buy or sell any securities. The opinions expressed are those of the authors and are subject to change without notice.
Investing in the stock market involves risk, including the possible loss of principal. Past performance is not indicative of future results. Readers should conduct their own research and consult with a qualified financial advisor before making any investment decisions.
This publication and its contributors may hold positions in the securities mentioned and may buy or sell such securities without notice. The
