The founder and CEO of Baron Funds, Ron Baron expects to see the Dow Jones Industrial Average Index at 650,000 in the next 50 years. Baron made this prediction during an October 25 interview with CNBC. On the same day, the Dow Jones Industrial Average Index closed at 26,958—just 1.6% below its all-time high.
Baron Funds has AUM (assets under management) of around $30 billion. On November 9, 2018, Baron predicted the Dow Jones’ rise to 500,000 in the next 50 years.
2019 versus 1969
On Friday, the billionaire investor noted, “The next 50 years is going to be similar to the last 50 years.” He was referring to the equity market return. He advised that despite equity market fears, a buy-and-hold strategy could multiply investors’ wealth over 24x in the next 50 years. For example, during the market turmoil in 1969, every penny invested then has risen at least 25x.
Based on Baron’s views, the current equity valuations are similar to that of 1969. At that time, the US economy was around $850 billion. Currently, the US economy is around $22 trillion. By 2070, the US economy could reach $500 trillion, according to Baron.
Moreover, Baron described 1969 as “turbulent times with “cities on fire” and Vietnam War protests.” In that period, the Dow Jones hovered around the 1,000 level. In our view, Baron might be comparing the current geopolitical risk to that of 1969, as reflected by his comments during the October 25 CNBC interview.
The ongoing US-China trade war, the civil war in the Middle East, and Britain’s exit from the European Union have decreased bullish sentiment toward equity investments. Besides, investors’ appetite for safe-haven assets like gold has risen.
Baron expects a growth rate of 6.5% in the US equity market over the next 50 years. At this growth rate, $1,000 invested in an equity index like the Dow Jones Industrial Average could grow to at least $23,000 by 2070.
Baron also highlighted the power of compounding on invested money, noting, “People forget about compounding.” Between 1969 and 2018, the S&P 500’s CAGR (compound annual growth rate) stood at around 6.6%. This calculation is based on the price appreciation of the S&P 500 Index, and the growth rate would exclude dividends.
Baron on low interest rates
According to Baron, the low-interest environment brings good incentives for equity investments. Currently, around $17 trillion in bonds bear a negative yield. The Eurozone and Japan have negative interest rates. According to former Federal Reserve Chairman Alan Greenspan, the US could be heading toward negative interest rates. Baron highlighted that the turnaround in technology is making businesses grow faster while reducing their costs.
On October 25, the yield on the 10-year Treasury bond is 1.80%. Plus, the dividend yield on the S&P 500 index was 1.8% on the same date. However, the risk of falling equity prices also impacts investment returns.
In our view, growth stocks such as Amazon (AMZN) and Facebook (FB) could be good potential investments for future growth. Year-to-date through October 25, AMZN and FB’s share prices have risen 17.3% and 43.3%, respectively.
The 2020 presidential election
Baron called Elizabeth Warren’s wealth tax plan as “pretty nuts.” However, Warren’s left-leaning thinking has made her popular in many parts of the US. Moreover, growing income inequality could also impact voters’ sentiments for the 2020 presidential election. Please read Do Analysts See an Easy Win for Trump in 2020 Election? to learn more about the factors that could influence next year’s election.
In September, hedge fund manager Leon Cooperman criticized Warren’s wealth tax. Cooperman believed that if she won the presidential election, the equity market could crash by 25%. However, bond king Bill Gross predicted a win for Warren.
Baron suggested that instead of a wealth tax, a VAT (value-added tax) could be an effective way to increase government income. About 140 countries, including every country in the Eurozone, implement a VAT to increase government revenue.