The Dow Jones Industrial Average (Dow) crossed the 20,000 level on Wednesday, Jan. 25, for the first time. Dow 20,000 has a nice ring to it, but the more important question is: What does this mean for investors? While human nature draws us to this nice round figure, it's the underlying factors for the stock market that are most informative about what might lay ahead.
Perspective on past Dow milestones
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Figures as of 1/25/2017, Source: Bloomberg, Robert Shiller rate data.
What got the Dow there?
- Sentiment has become notably more positive since the election, as expectations for U.S. economic growth have been lifted by the prospects of an infrastructure spending stimulus package, a reduced regulatory burden on U.S. companies and tax reform. In response, stocks have rallied and interest rates have moved higher.
- The Dow is up more than 1,700 points since the start of November and has risen 25% over the past year. It's gained 204% since the Great Recession's 2009 low.
- Financials have provided the biggest boost to the market recently. Industrial and energy companies also have been among the Dow's strongest performers, reflecting the post-election expectations for increased infrastructure and energy industry investment.
What does it tell us about the path ahead?
- Hovering near 20,000 means U.S. stocks are trading at 17-times earnings, slightly above the long-term average.1 Fortunately, the new highs for U.S. stock indexes are not accompanied by record high valuations. (In 1999, the original year of Dow 10,000, stocks traded at a P/E above 23.)
- With stock market valuations at current levels, we think gains from here will be driven by the pace of earnings growth. Slightly better economic growth, coupled with reduced headwinds from fluctuating currencies and oil prices will, in our view, support a rebound in corporate profits. We think the bull market in stocks can continue in 2017, but expect more volatility and periodic pullbacks versus the steady ascent we've seen recently.
- Set appropriate expectations for performance. The Dow is comprised of just U.S. large-cap equities, and is not the standard against which diversified portfolios' performance should be held.
- Dow 20,000 may have some headline appeal, but for long-term investors, it's just a number. The more important number is the one related to your long-term goals. Use this market milestone and the broader outlook for investments as an opportunity to review your goals and comfort with risk. Your Edward Jones advisor can help you ensure portfolios are aligned with each to keep you on track.
1. Source: Bloomberg forward 12-month consensus earnings estimates.