Andrew Adams, Market Strategist, comments on the index’s historic high and whether this milestone will have a long-term impact on markets.
In many cases, the amount of attention something gets is inversely related to how important it actually is to the markets. In other words, the more the media and weekend investors talk about something, the less impact it generally has on stock prices. The Dow Jones Industrial Average hitting the 20,000 milestone is a perfect example of this phenomenon, and it likely will not matter much in the long run. It can, by all means, be celebrated, but it’s hopefully just one threshold of many that will be hit along the way during the secular bull market that we believe is still fully in effect.
Dow 20,000 certainly sounds great, but there are a few things to keep in mind before putting too much emphasis on it. First, remember that the DJIA consists of just 30 U.S. stocks. It’s not as representative of the broad market as it used to be, which is why the S&P 500 is more widely used for benchmarking purposes. Also, as the level of the Dow rises, each 1,000-point threshold represents a smaller and smaller percentage change; therefore, these milestones have less and less significance. As Bespoke Investment Group points out, “When people were focused on Dow 10,000 in 1999, 1,000 points represented 10% of the index. At 20,000, though, 1,000 points only represents 5%.” In fact, the Dow hit 19,000 for the first time on November 22, 2016 – so the biggest surprise about hitting 20,000 is actually that it’s happened so soon after 19,000.
There is nothing wrong with putting on your party hat to honor Dow 20,000, but it should be viewed as a stepping stone rather than a finish line. It likely will have no effect on the markets in the long run, and it shouldn’t be something to be overly concerned or excited about.
Opinions expressed are those of the author and are subject to change. Past performance may not be indicative of future results. There is no assurance any of the trends mentioned will continue or any forecasts will occur. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The S&P 500 is an unmanaged index of 500 widely held stocks. Investors cannot invest directly in an index.
