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Technology Stocks : Cisco Systems, Inc. (CSCO)
CSCO 77.42+4.6%3:59 PM EST
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To: RetiredNow who wrote (61265)9/12/2002 1:17:13 PM
From: Stock Farmer  Read Replies (1) of 77398
 
Hmmm... re-reading my earlier post I'm sure it's clear as mud. Try 2.

Let's say that Cisco is representative of the market. Both are over priced. We estimated Cisco was worth about $8 a share and it's trading at $13.25 a share. We also assume that over the long term the price of the market will converge on its economic value.

Now, if the Dow is similarly over priced and is trading at 8433, then we can extrapolate it's actual value at 8/13.25 x 8433 = 5087. Remarkably close to that "Dow 5000" number you've heard from folks who might know something about mathematics and economics and the process of curing the madness of crowds.

In the long term, we expect the Dow to converge towards its economic value, which should be lifting from 5087 by the rate of growth that is occuring in the economy over that period of time.

Let's take 10% growth in the economy for 5.3 years. That would move our 5087 Dow to 8433 and "lift" the market to... hmmm.. just about where it is today.

Now, if the economy grows more slowly than 10%, say 5%... well we'd have to wait 17 years before we see 8433 again.

This is the point I was making. If these assumptions hold true, then even moderate economic growth means you can kiss returns in the stock market goodbye for a long time. Bear market rallies notwithstanding.

John
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