The Independent Market Observer

Dow 24K: Cue the Fireworks?

Posted by Brad McMillan, CFA®, CFP®

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This entry was posted on Dec 1, 2017 1:58:19 PM

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Dow 24KWell, the Dow has hit another milestone: 24K. Should we cue the fireworks, cheering, champagne bottles, and so forth? Since it is the fifth time this year that a 1,000-point milestone has happened, perhaps we want to take a step back first. Anything that happens five times in a year is hardly uncommon—and perhaps not worth getting all that excited about.

This year’s market milestones

The Dow cracked 20K in late January, 21K at the start of March, 22K at the beginning of August, 23K in mid-October, and 24K yesterday. Not only have there been five 1,000-point records this year, but they seem to be coming faster. Perhaps we will even get another one by year’s end.

Let’s take the bigger milestone: the 4,000-point move the Dow has made this year. To find the same gain before that, you have to first go back to 2013, when the Dow hit 16K in November before rising to 18K in December 2014. As we know, it took until January 2017 to get to the next 2,000-point bump to reach 20K. So, the last 4,000-point rise took more than four years, with a 2,000-point increase in 2014 followed by years of back-and-forth market action until the market started moving higher about a year ago. This recent 4,000-point jump took less than one year. Just think about that.

A cautionary lesson

Remember, the past five years and more have been terrific ones for U.S. stock markets. This year, with its multiple records, has been especially great. Not all years can be great, however. The aftermath of the last great surge in the Dow in 2014, after which markets were flat or down for two years, should be a cautionary lesson.

This year has seen, in point terms, twice as big a gain as we saw in 2014. In percentage terms, of course, the gain is relatively smaller, but still well above what we saw then. When markets move up this much and this fast, they often need time to take a break and to let fundamentals catch up with the new valuations. Future returns, over the next several years, are often less than people expect after the good years.

The Dow is not the stock market

The Dow also has quirks of its own to consider. It is a price-weighted index, for example, so companies with higher share prices have more weight in the index, even if they are not the biggest ones by, for example, sales or market capitalization. The Dow also includes only 30 companies, making it far less representative than other indices. In other words, even though it seems like the Dow is the stock market, it really is not.

The S&P 500, a much more representative index (but still only 500 large companies), is trailing behind the Dow, both in percentage terms and in the number of milestones. In this case, it is 100-point blocks. The gap is due to the quirks in the Dow and implies that the market as a whole is not doing quite as well as the Dow would suggest. Smaller company indices are doing even less well. The Dow, with 30 of the best-known companies, is leading the way, but it is not the whole parade.

Enjoy the celebration, but . . .

By all means, enjoy the celebration and drink the champagne. But remember this is not necessarily a sign that everything is as good as the headlines suggest—now or, especially, looking forward.

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