The Curse of Round Numbers

Tobias Levkovich is chief U.S. equity strategist for Citigroup Global Markets, in New York City. We talked with him about why the Dow Jones industrial average sometimes seems to hover around round numbers for a long time ... and what it will take to reach Dow 100,000.

The Dow Jones industrial average recently made big headlines when it breached the 10,000 level -- again. It seems as though the market gets stuck at these round numbers.

It does. Dow 100 was hit in August 1922, and markets stayed within a range of 100 for nearly 20 years. Dow 1000 was no different. After coming within 1% of that level in January 1966, it traded around that number for roughly 17 years. We reached 10,000 when Rudy Giuliani was still mayor of New York City, and we’ve been there for ten and a half years. These big, round numbers tend to be sticky.

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How come?

It’s psychological. And a lot of it may be a generational thing. Every generation has experienced an economic period that’s been meaningfully difficult. Our grandparents had the Great Depression; our parents had the 1970s, with a steep recession and high inflation. We’re going through a difficult period now.

So, are we stuck?

We’ve had a 60% rally off the bottom in March. This is the fourth-largest rally off a bear-market bottom since 1929. After you get these big moves, the market has to consolidate. And you still have to address some economic fundamentals lurking in the background -- prospects for corporate earnings and higher interest rates, for example. It takes time for these things to be addressed. When you hit big landmarks, it tends to take longer [see Kiplinger’s 2010 market outlook].

The next big, round number on the Dow seems impossibly far away.

The time that the Dow spends hovering around big, round numbers has grown shorter, given the greater amounts of money invested in stocks and the ease of trading. Sometime in the next five years would be par for the course for a new bull market to break out.

Dow 100,000 seems like an almost outrageous level to consider. But if it took 40 years from the day the Dow broke above 10,000 for the first time to achieve ten times that figure, it would require less than a 6% compound annual return -- which is not altogether implausible.