Dow Jones Industrial Average at 12000

If you're a fan of the Dow Jones Industrial Average, then you know that it's been awhile since it's crossed a major milestone.  In fact, on May 6, 2006 it was seven years since the Dow first passed the 11,000 mark.  So what's the logical question on everyone's mind - How soon until we see the Dow Jones Industrial Average at 12,000?

Update to the Dow at 12,000

On October 19, 2006, the Dow finally crossed the 12,000 mark roughly seven years and five months after reaching 11,000.  Below is an article written using the tools and techniques described elsewhere on this website.  While our prediction of June 2007 did not come true, the techniques described in this article still serve as an good example of the thought process that you need to go through when solving this problem.

Predicting the Dow at 12,000

What do you think?  Hold onto your predictions for the time being.  Before we get to our prediction of when the Dow will pass the 12,000 mark, let's briefly discuss what we're not going to talk about.

We're not going to discuss momentum or charting in our version of the Dow at 12,000.  Our prediction's going to be made based on fundamental data - earnings per share, P/E ratios and growth in earnings.

In fact, the prediction we're going to share with you isn't really even ours in the first place.  We're going to leverage the information that stock analysts and industry experts publish to the marketplace to figure out when they believe the Dow is going to pass the 12,000 mark.

Calculating the Dow Jones Industrial Average

Calculating the DJIA is pretty straightforward.  That's because you only need three bits of data to do the calculation:

1. The companies that make up the Dow, also known as the components of the Dow Jones Industrial Average.
2. The stock prices for each of these components.
3. The Dow Jones Divisor.

The DJIA is calculated by multiplying each of the stock prices times the DJIA Divisor and summing all of the results.  The sum of these results is the actual DJIA for that particular trading day.

The Dow Jones Divisor

In case you're wondering, the Dow Jones Divisor is a mechanism that Dow Jones uses to preserve the historical trending of their averages.  When it was first developed the DJIA was computed by simply adding up all of the prices of the underlying stocks.  This method worked well until stock splits began occurring or when the components themselves started to change.

The Divisor was developed to normalize for stock splits and companies that entered and exited the DJIA.  Each time a stock in the Dow splits or a new company is introduced into the average, the Divisor changes.  By introducing a Divisor into the calculation, the DJIA could make each of these types of transitions smoother, and more meaningful, by preserving the numerical history of the Dow.

Dow Jones Industrial Average Prediction

So once we grabbed our list of the companies making up the Dow, we pulled all of the earnings estimates the analysts made for year end 2006.  We also wanted to know what the earnings growth rate was for next year - 2007.  By using these two values, we could derive the earnings estimates for both 2006 and 2007.

This information, along with the forward P/E ratio for each company appears in the table below:

DJIA Earning Estimates and Forward P/E Ratio

Finally, if we take those projected stock prices and divide by the Dow Divisor, we can see each company's contribution to the Dow Jones Industrial Average.  By adding that information together we can see where the analysts think the Dow is heading.

DJIA Future Stock Prices and Contributions

The Dow Jones Divisor at the time of writing was 0.12493117.  To develop this prediction we also had to make one slight adjustment to the General Motors information.  Because their EPS was negative in 2006, this throws the forward P/E ratio out of whack.  We simply substituted their 5-year average P/E ratio to compute their stock price in 2007.

If you're interested in learning more about some of the terms used in this calculation, we've thoroughly cover the topic of understanding financial ratios elsewhere on this website.

When Will the Dow Hit 12,000?

So to answer the long-standing question of - When will the Dow hit 12,000?  We simply turned to the experts for their opinions.  If you think the Dow is going to hit 12,000 in 2006, you're in the minority. The analysts actually predict very little movement in the Dow for 2006.

According to the experts, the Dow is going to hit 12,490 by year end in 2007.  Exactly when in 2007, we're not sure but a reasonable guess is June 2007.  And we think our method is as reasonable, and accurate, as any other we've seen published.  Now here comes the waiting game to see if that prediction comes true.

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