The Dow Jones Industrial Average hit uncharted territory Wednesday, climbing above 20,000 for the first time in its 131-year history.
It’s only the latest milestone in a record-setting drive for the stock market, with the S&P 500 and Nasdaq also rising sharply. But it’s the Dow, which tracks 30 major industrial companies, that’s grabbing all the headlines after it finally cracked the 20,000 mark, weeks after it came within a point of the historic milestone on Jan. 6.
But how significant is #Dow20K really?
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Experts warn that the Dow is fundamentally flawed as a market index and that while the 20,000 mark is a welcome psychological boost, it’s hardly a harbinger of sustainable market prosperity.
“20,000 itself, in my opinion, has no particular meaning. It gets people excited and we’re in a bit of a momentum market right now… but I think there’s a danger in over-dramatizing the numbers,” Eric Kirzner, professor of investment finance at the University of Toronto, told Global News.
“In and of itself, it is just a number,” said Quincy Krosby, market strategist at Prudential Financial. “But what it does is it lifts market expectations, in essence, to continue moving higher.”
The market has been marching steadily higher since bottoming out in March 2009 in the aftermath of the financial crisis. The rally continued after the election of Donald Trump as U.S. president last fall. The Dow first closed above 10,000 on March 29, 1999.
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“10,000 was the magic number back then. If you look at the headlines, everybody was talking about it. Then, of course, we went into the tech bubble… then of course after the financial crisis it took until October 2009 for it to again get back to 10,000,” Kirzner says.
The Dow essentially combines the total value of the stocks of 30 big U.S. companies, with companies removed from and added to the list every year.
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Apple was only added to the list in March 2015, while General Electric has been an ever-present since 1907.
“The Dow is not a particularly well-constructed index. It’s a price-rated index and its components have changed substantially over the years,” Kirzner said.
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The index also doesn’t adjust for inflation and doesn’t include companies beyond the chosen 30, but Kirzner says it continues to persist as a focal point, helped by its historic status as well as the fact that it generally tends to correlate with the far better-constructed S&P 500 index.
The Dow would end the trading day up 155.80 points, or 0.78 per cent, at 20,068.51, led by gains in banks and other financial companies. The S&P 500 was up 18.30 points at 2,298.37, while the Nasdaq composite was ahead by 55.38 points at 5,656.34 – both at record closes.
Kirzner says that rather than fixating on the 20,000 mark, investors should give more credence to longer-term trends, such as the fact that the Dow has more than doubled since October 2009, when it hovered between 9,000 and 10,000.
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“If you consider the doubling in a little over seven years, that translates into an annual compounded growth rate of a little less than 10 per cent. It’s still terrific but it’s less dramatic when you translate it that way. I think it has more meaning,” he said.
Wednesday’s rally comes against a backdrop of optimism on Wall Street that executive actions and policy goals announced by the Trump administration this week on trade, manufacturing and business deregulation will be good for corporate America.
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“Most people were expecting a decline after Trump was elected but markets have been stronger, the U.S. economy is not in bad shape, interest rates remain low and earnings are coming in slightly above expectations, and we have the expectation of a lot of infrastructure spending,” Kirzner said.
“The 20,000 is a pleasant event today but ultimately it’s going to be the earnings announcements, interest rates and growth prospects in the United States — as Trump’s policies unfold and their implications for earnings and growth become clear — that ultimately fuel this market one way or the other.”
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So what does this mean for investors?
Kirzner advises against knee-jerk reactions and over-the-top optimism.
“Stocks are not bargains at this level, they’re not grossly overvalued either,” Kirzner said. “So as an investor, and advising investors, I would take a fairly cautious approach from here.”
“Whether it’s tax reform or infrastructure spending, any of those tend to be optimistic conversations for the markets currently,” said Darrell Cronk, president of Wells Fargo Investment Institute. “We have to wait and see how they play out, obviously. The danger here, if there is one, is that the market gets ahead of itself a little bit.”
— With files from the Associated Press
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