What’s in a number anyway? That may be the question stock-market investors pose as the Dow Jones Industrial Average inches closer to the psychological milestone of 20,000.
The Dow DJIA, -0.60% sold off on Wednesday as the Federal Open Market Committee raised rates for the first time in 12 months and communicated that future hikes would come at a faster pace than had previously been expected. Still, the Dow was still just about 200 points shy of spanning the 1,000-point distance since it reached 19,000 on Nov. 22, which would mark the fastest such ascent for the gauge in its history.
But, is the rise for the Dow really that significant? Some critics point out the benchmark only represents a smattering (30 in total) of the thousands of stocks that make up the broader equity market. Moreover, outsize moves in any one of its components, because the gauge is price weighted, can have big effect on the Dow. Notably, the surge in shares of Goldman Sachs GS, +0.58% which has benefited from expectations of looser Wall Street regulation and higher interest rates, has contributed about one-third of the Dow’s recent 1,000 point move since hitting 19,000 back on Nov. 22.
Also worth point out is that 1,000-point moves for the Dow aren’t what they used to be. In other words, when the Dow struggled and finally doubled from 1,000 to 2,000 in 1987 that move represented a 100% advance, but a climb to 20,000 from 19,000 represents a comparatively pedestrian 5% rise (as the chart included in this article shows). Of course, those returns highlight the silliness of keying in on arbitrary milestones and the law of diminishing returns as it relates to 1,000-point advances.
Only. don’t tell that to some market watchers.
The 120-year-old stock-market gauge holds a special place in the hearts of Wall Street investors. Here are some of their views as the 20,000 milestone approaches:
|The Dow remains the most watched measure of US stock market performance for the majority of Americans. That’s mostly because it has been around since 1896—it has a lot of history. If you ask the average American ‘How’d the market do today?’ they will invariably quote you the Dow.
Big round numbers gather attention, and Dow 20,000 will certainly be a level people notice. It is also important that it comes right after the presidential election, and the common wisdom had it that a Trump victory would hurt equity prices. Hitting 20,000 shows how wrong that pessimistic take really was.—Nicholas Colas, chief market strategist at Convergex
|We view the Dow 20,000 level as more psychological than material for our investment process. Still, the Dow 20,000 mark could become a catalyst that encourages more retail investment. While this would likely boost all major stock markets, we would become concerned about a retail-driven rally post Dow 20,000.
—Mike Bailey, director of research at FBB Capital Partners, which oversees $900 million in assets.
Along those lines some market participants think that pushing through milestones confirm and extend ongoing trends:
In and of itself, Dow 20K is not significant—but it is in what it means for the larger market. Typically, major milestones have acted as ceilings, and for an index to break through takes a lot of energy. If this market has enough push to break through 20K convincingly, it is quite possible we may see it run much further, and that is what people are watching for. Not so much 20K, but what is likely to come after that.—Brad McMillan, chief investment officer at Commonwealth Financial Network.
Part of the rally for the Dow, which coincides with record moves in the S&P 500 index SPX, -0.81% and the Nasdaq Composite Index COMP, -0.50% is on the back of hopes, as Colas highlights, that President-elect Donald Trump will deliver on promises to increase fiscal spending, reduce corporate taxes and dial down regulations that Wall Street views as debilitating to economic growth.