The Dow is languishing at about 44 percent below its estimated fair value, and investors can "reasonably expect" a rate of return that is higher than historical averages in the coming years, according to economists.
"One year ago, we thought the Dow Jones Industrial Average would finish 2008 at 15,000. Needless to say, the Dow is nowhere near this level and would need an unprecedented miracle to get there in the next few days, economists Brian Wesbury and Robert
Stein write in Forbes Magazine.
"Nonetheless, our model for valuing the broad U.S. equity market continues to signal that fair value for the Dow is at or above 15,000."
Wesbury cautions that this statement is not some bold prediction. He and Stein don't think the Dow will reach 15,000 anytime soon.
"What this model is saying is that if the Dow were trading at 15,000 today, expectations of future returns would settle at a historical average rate of return," Wesbury and Stein indicate.
To determine fair value for the stock market, the duo takes the level of corporate profits as measured by the government and then discounts these profits by the prevailing credit-risk-free rate of return measured by the 10-year U.S. Treasury interest rate.
"The market is cheaper than it was in 1974, 1982 and 1994 — all of which had huge bull markets ahead of them,” Wesbury and Stein report.
Other Wall Street gurus agree there's a lot of upside potential.
According to USA Today, a review of year-end '09 targets by five top market strategists found that nearly all expect double-digit percentage gains.
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