(NLY) As the Dow Cracks 10,000 – What’s Next for the Market?

October 20th, 2009

by Dr. Mark Skousen, Contributing Editor
Monday, October 19, 2009: Issue #1118

Last week, my “crazy prediction” came true.

In the March issue of my newsletter, Forecasts & Strategies, I published a chart, which illustrated the maximum pessimism in the stock market.

The difference was, though, that while most other people were running away from the market, I stated that stocks were a “screaming buy.”

And in an interview with Jeremy Siegel in May, I followed that up by offering three reasons why the Dow Jones Industrial Index was headed for 10,000. Specifically, they were…

The Fed’s “zero” interest rate policy and an expanding money supply (still in place).
Obama’s stimulus package favored bailing out bad mortgages and assets in the economy through massive deficit spending. I said: “Essentially, the government is putting a floor under the real estate market, which will keep it from collapsing any further.”
Historically, stocks perform extremely well following a major crash. According to Jeremy Siegel, author of Stocks for the Long Run, every time the market hits bottom after a crash, the rally can be quick and powerful. After a major bear market, stocks rebound by 24% on average during the first year of recovery. And the average annual return over the next five years is 18%.

In short, I said it wasn’t too late to get invested: “Since the Dow was around 8,300 at the first of the year, it could climb back to 10,000 by year end. And although the easy money has been made and the market will be volatile, it’s not too late to get aboard.”

But what about now?

Pinpointing the Next Milestones for the Dow

If history is any guide, given what I just mentioned about stocks rebounding by 24% on average during the first year of recovery, it means the Dow could exceed 11,000 by the end of 2009.

Moreover, it could reach 15,000 over the next four years, according to the trend.

But recall that the Dow Jones Industrial Average has gone nowhere over the past 10 years. However, it has crossed the 10,000 mark 50 times during this decade looking for direction.

The Dow Jones Industrial Average crosses the 10,000 mark for the 50th time

The situation reminds me of the Dow during the 1969-82 bear market, when Wall Street faced a series of crises in inflation, energy and political scandals.

After 10 years of stagnation, it might be time for Wall Street to rally again – and move substantially above 10,000 for good.

But there’s an even bigger story…

Why the Dow and Gold Will Continue to Rise

While the Dow has underperformed this century, gold – the ultimate inflation/crisis hedge – has tripled. The “Midas Metal” surpassed its own barrier last month, cracking the $1,000 per ounce mark and today’s situation is not unlike that of the 1970s.

From here, I suspect that both the Dow and gold will head higher for a while. Why? Because the Fed is determined to maintain a “zero” interest rate policy until the U.S. economy is clearly out of the woods.

That can only mean a weak dollar and higher prices for oil and gold.

However, oil and gasoline prices can only go up so much without disrupting the U.S. industrial base. At some point, all cycles come to an end, and the Fed will be forced to raise rates to a “natural” level – around 4% or so. When it happens, expect the dollar to rally and gold to come back down.

So what does that mean for the market? And what are the best investments?

Three Investments to Buy Now

I don’t think the Dow will fall with gold. It should move higher as we return to economic normalcy. Of course, that’s barring more blunders by the Obama administration – for example, raising taxes, nationalizing healthcare, running bigger deficits, expanding the war in the Middle East, etc. If such events occur, all bets are off.

Where to invest now? Dividend-paying stocks are still offering above historic yields, which means financial stocks have more room to grow. My favorites:

Annaly Capital Management (NYSE: NLY) – a REIT that yields 15%.
Alliance Bernstein Holding (NYSE: AB) – an international money management firm that sports a 6% yield.
Penn West Energy Trust (NYSE: PWE) – a Canadian oil and gas trust that churns out a 10% yield.

Good trading,

Mark

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