The Dow Jones Industrial Average finally hit 20,000 for the first time on Wednesday.
After two months and several teases — even to 19,999.63 earlier in January — the index finally achieved the milestone right as the stock market opened for trading.
Like 30th or 40th birthdays, Dow 20,000 matters more than other levels, in part, only because it’s a round number. “On its own, that doesn’t mean much to many serious investors,” said Ryan Detrick, a senior market strategist at LPL Financial, which oversees $502 billion in assets.
It’s what brought the market here and what may happen next that’s worth paying attention to.
“We’ve been in a very tight range, and now we’re breaking out to the upside,” Detrick told Business Insider. “That’s picture-perfect.”
The Dow is a price-weighted index of 30 important publicly traded companies that are used as a barometer of both the stock market and the overall US economy. It’s a price-weighted index, meaning that stocks with higher prices have a greater influence on the Dow’s direction. That’s unlike the larger S&P 500 index, which is weighted by market capitalisation and is more influenced by its components’ actual value.
The weighting helps explain why Goldman Sachs’ stock, the highest-priced on the Dow, contributed the most to achieving 20,000. A 1% move in Goldman Sachs, currently priced at about $236 a share, leads to a 16 point move in the Dow. Since the election, Goldman has rallied about 30%. But it only explains a small part of the story.
Part of the rally was simply due to Wall Street’s sigh of relief after Trump won the electoral college by a strong margin and Hillary Clinton conceded defeat.
“The post-election rally was more about a reduction in the uncertainty,” said Brad McMillan, the chief investment officer at Commonwealth Financial Network. “In other words, now we basically know what we’re getting,” he told Business Insider.
After the election, investors began to come to terms with the unexpected realities of what Trump would mean for markets and the economy. The lower corporate taxes, fewer business regulations, and big infrastructure spending that Trump had promised all appeared to be clearly pro-business, boosting confidence.
Trump got straight to it during his first week in office. On Tuesday, he signed an executive order to proceed with the Keystone XL and Dakota Access pipelines, and met with auto CEOs to urge domestic production.
When’s Dow 21,000?
“The fact that we finally have cracked that barrier suggests that the rally is very likely to continue,” McMillan said. “Barriers like that are hard to break and once they are broken, they can act as a support level.”
But a close above 20,000 on Wednesday is what’s needed to cement the milestone. It would officially make the move from 19,000 the second-fastest 1,000-point move ever at 64 days. The record is 35 days from 10,000 to 11,000 in 1999, just as sky-high valuations led to the end of the dot-com bubble.
Stocks appear expensive again. The cyclically adjusted price-to-earnings ratio, a valuation metric based on the last 10 years of average earnings and calibrated for inflation, is at the highest level since the early 2000s. Even before the post-election rally, Savita Subramanian, a strategist at Bank of America Merrill Lynch, showed that most valuation metrics were above their historical average.
Dow 20,000 is a good moment to remember how expensive stocks are. Of course, high valuations don’t imply an imminent crash. And several strategists including Subramanian do not anticipate a 2000-style collapse anytime soon.
For one, earnings growth may finally be catching up to the rise in prices. On aggregate, S&P 500 earnings increased in the third quarter for the first time in six quarters, and are on track to grow again in the Q4. On Wednesday, a spike in Boeing shares on the back of better-than-forecast earnings that helped to tip the Dow over 20,000.
Gains in financial stocks and small cap stocks — the leaders in the post-election move that leveled off early in January — helped with the final push above 20,000 after the Dow traded in one of its tightest ranges in decades. That comeback suggests that the rally has some longevity, Detrick said.
Business Insider Emails & Alerts
Site highlights each day to your inbox.