For the first time, the Dow Jones industrial average topped 20,000. A look back at Dow’s monthly performance since its inception in 1896.
By Ramon Padilla, Jim Sergent, Adam Shell
The most widely followed stock-market barometer rose to a historic level Wednesday, eliciting cheers on Wall Street but also causing more than a few people to wonder what all the fuss is about.
After meandering for weeks around the 19,800 and 19,900 marks, the Dow Jones Industrial Average finally surpassed the 20,000 level for the first time as the market opened Wednesday morning.
If you haven’t been following the stock market’s progress in recent months, you’re not alone. Only about half of American adults own stocks or stock mutual funds directly or have indirect stakes in the market through pension plans. Still, this is a significant financial milestone to which it’s worth paying some attention.
What is the Dow Jones Industrial Average exactly?
It’s a barometer or measure that tracks the share-price movements of 30 of America’s largest corporations — an elite group that includes Apple, ExxonMobil, JPMorgan Chase, Boeing, Wal-Mart and Johnson Johnson. The measure was put together 120 years ago, in an era when financial statistics were in their infancy, to provide a general sense of how the stock market was behaving. Back then, the Dow tracked just 12 stocks but now includes 30, of which General Electric is the only original direct member. In a sense, the 20,000 figure roughly corresponds to what it would cost to buy one share of all 30 companies, though that’s misleading because the total has been adjusted drastically over the years for stock splits, spinoffs, the addition of certain companies and the deletion of others.
Is there something magical about hitting 20,000?
In terms of fundamental investment underpinnings, not really. But in terms of investor psychology, most definitely. Many investors and traders pay close attention when the stock market nears and surpasses important milestones, especially large round numbers. Some will view the Dow’s breaching of 20,000 as a signal that stocks have become wildly overvalued, but it also indicates there’s a lot of momentum for buying stocks right now.
Does the Dow reflect the market overall?
Yes and no. With only 30 companies, the Dow includes less than 1 percent of all the stocks that trade fairly regularly in the U.S. It’s thus much less comprehensive than, say, the Wilshire 5000 Total Market Index which, despite its name, tracks about 3,500 stocks, or even the Standard Poor’s 500, which tracks 500. Still, the Dow is historically important and the most well-known measure. It also correlates or moves fairly closely in line with other barometers including the SP 500. When the Dow is rising, so usually are the others.
If I don’t own stock directly, should I care about any of this?
Probably so. For starters, you might be covered by a pension plan, nearly all of which have significant stakes in the stock market, meaning their payouts to retirees depend largely on long-term investment results. So do other types of funds and entities that might affect you. For example, the amount of money distributed to Arizona schools annually by the state’s Permanent Land Endowment Trust Fund depends on this fund’s stock- and bond-market results, not on direct land sales. As another example, if your employer is a publicly traded corporation and its stock price is rising, the company might have more financial strength and greater confidence to hire more workers and expand in other ways.
Are there any Arizona-based stocks in the Dow 30 average?
No, though a few Arizona corporations are found in the SP 500 such as Republic Services and Freeport-McMoRan. Many stock-market barometers are somewhat arbitrary, meaning there is judgment behind which companies get selected. Editors at the Wall Street Journal help select the 30 Dow companies, focusing on many of the nation’s most valuable and profitable entities representing a mix of important industries.
So why have the Dow 30 stocks been rising?
The market had been in a modest uptrend earlier in 2016, but stocks got a second wind following the presidential election. Several factors seem to have boosted confidence among investors. Part of the credit can be attributed to the pro-business policies of President Donald Trump, including his pledge to increase infrastructure spending and de-emphasize regulations — shares of banking companies have been especially buoyant lately. Also, Trump’s promise to cut taxes, underscored by Republican majorities in both houses of Congress, is seen as stimulative for the economy. Federal Reserve policies have provided a bullish backdrop for the rally.
Furthermore, many investors and traders could be feeling better simply because the nasty, rancorous election campaign has come and gone. There’s also something to be said for seasonal factors, as December historically has been one the second best month (after July) for the Dow, and January also has been a good month. But the bottom line is that more people see the economy strengthening, which should help corporations boost profits.
Are there any potential risks or dangers?
Yes. There always are. To name a few: Trump and the Republicans might not achieve their goals, and they could spark negative economic brushfires such as trade wars with China or Mexico. Interest rates now are rising, which could slow the economy, and the dollar is at a 14-year high, which likely will curtail exports. Further, Trump’s proposed tax cuts very likely could blow an even bigger hole in the federal deficit.
Meanwhile, stock prices certainly aren’t cheap by historic standards, and much-anticipated gains in corporate profitability could be slow to materialize. Plus, the economies of many foreign nations, especially Japan and certain European nations, are merely treading water.
In other words, the recent rise in optimism hasn’t yet been borne out by many hard results. The U.S. economy still resembles a slow-moving aircraft carrier that will have trouble picking up speed. But many investors are buoyed that there’s a new captain at the helm.
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