Milestone market levels cause both celebration and concern. But is either reaction justified?
It seems like only yesterday that the Dow Jones Industrial Average (Dow) first pierced the psychologically-important 10,000 mark. I remember gathering around the office televisions on March 29, 1999, to watch the Big Board move into five-digit territory. The traders on Wall Street erupted in cheers and paid homage to the old ticker-tape days by throwing confetti into the air. Investors donned “Dow 10,000” hats while the analysts and pundits prophesized about a prolonged era of stock market gains and mounting prosperity.
At the time, Dow 10,000 seemed destined to one day be as outdated as Y2K fears or “La Vida Loca” or tiny backpacks. Alas, time flew but the market didn’t – it fell back below the 10,000 level and didn’t top it again until 2009 (to much less excitement this time – we’d landed on this moon before).
By the time the Dow breached 20,000, over 17 years had passed since that euphoric day in 1999. Dow 20,000 wasn’t met with nearly the same fanfare. In fact, many pundits coined it “the least loved bull market in history.” Perhaps, after the tech wreck and the financial crisis, we were too world-weary to celebrate. And yet maybe the missing jubilation was as good a sign as any that the advance would continue.
What does Dow 30,000 mean for investors?
Fast forward to today. Four years, a coronavirus outbreak, and a 50% advance later and we are celebrating Dow 30,000. Some investors may feel euphoric today. Others, given the market’s 20-year history, might view Dow 30,000 with trepidation. I’d advise investors to not be overly impressed – or overly concerned – with large numbers. Here’s why:
- A new high is not in itself any kind of danger sign. Stock market averages are not mean-reverting. They are a mirror on a growing economy for the US and the world. If you believe that the world will continue to get better for most inhabitants of Planet Earth, then you should expect markets to trend upward over long periods.
- New highs offer very little information in and of themselves. In my view, it is far more interesting to compare the price of an index to the fundamental characteristics (earnings, sales, book value) of the companies within it. For example, in 1999, the Dow at 10,000 was trading at nearly 30x its earnings per share, representing a once-in-a-generation high.1 The next time we crossed 10,000 in 2009, the Dow was trading at 12x earnings, representing the lowest valuations in nearly 40 years.1 Today, with the Dow at 30,000, its valuation is in the middle of those two extremes.1
To further illustrate that last point, consider a different index – the S&P 500 Index (with 500 stocks, it’s a broader representation of the market than the 30-stock Dow Jones Industrial Average). The S&P 500 has hit 1,093 new highs since the index’s 1957 inception – on average, that’s a new high every 15 days.2 So in my view, while its most recent new high of approximately 3,625 is not as headline-grabbing as Dow 30,000, it is equally as noteworthy – and uninformative – in and of itself.2
So today, I am not going to party like it’s 1999. But I’m also not going to look for the sky to fall, either. Rather, I will rest assured in my belief that the markets will continue to ascend to new highs in my lifetime, even if the path isn’t always a straight one.
1 Sources: Bloomberg, L.P., Dow Jones
2 Sources: Bloomberg, L.P., Standard & Poor’s
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The Dow Jones Industrial Average is a price-weighted index of the 30 largest, most widely held stocks traded on the New York Stock Exchange.
The S&P 500® Index is an unmanaged index considered representative of the US stock market.
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Dow 30,000: We made it! Now what? by Invesco US
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