What It Means When the Dow Hits Big Round Numbers

Important Things to Remember as the Dow Hits New High of 19,000

Did you hear???? The Dow recently hit 19,000 — a new record!

Every time the stock market hits a round-number high, people get excited. This new high has been building since the election and is powered largely by bullishness about industries that may benefit from the Trump victory — banks, defense contractors, and industrials.

Yes, Dow 19,000 is welcome news. But it’s important to keep things in perspective.

Round benchmarks in the stock market are show horses. They are pretty to watch, but they don’t really do the hard work of driving the market. In fact, these benchmarks can distract investors from what really matters in the market.

Here are some important things to remember as the Dow 19,000 hype rings in your ears:

A 1000-point gain on the Dow isn’t what it used to be. The rise from 18,000 to 19,000 represents just 5.5 percent growth — and it took almost two years to hit that new mark. Almost 500 trading days to move only 5.5 percent higher. That’s nothing to sneeze at, but also not an epic move. 

  • Any stock market number is simply a numerical expression of what companies are earning and what they are expected to earn over time combined with how investors are feeling at the moment about the economy and the world at large.
  • So, earnings are what really matter. Aggregate earnings for the S&P 500 are nearly $120 over the past year. That puts this market level, the Dow and S&P 500 at a moderate to moderately-high Price to Earnings, which is the true measure of how stocks should be priced. Third quarter earnings for the S&P 500 rose 3 percent, the largest gain in profits we’ve seen in the past two years. What’s most important is that earnings are still expected to grow close to 10 percent over the next year. This potential earnings growth means infinitely more than the Dow hitting 19,000.
  • Donald Trump’s unexpected win for the White House has already impacted the market in a significant way. Typically the stock market likes certainty. That’s why it tumbled every time Hillary Clinton fell behind Trump in the Presidential polls. Hillary — for better or worse — represented the known. But the market has thrived on the “positive uncertainty” created by Trump’s win. Investors seem to want to believe Trump will deliver on his promises to lower taxes, strike better trade deals, rebuild our infrastructure plan, update the military and revamp Obamacare. That explains why roughly a month after the election aerospace/defense stocks were up 12 percent, banks and many financial companies were up 15 percent, and Caterpillar (CAT), a harbinger of infrastructure companies, had jumped 16 percent. 
  • The prospect of the economy running hotter than we’ve seen over the past eight years due to Trump’s policies has also impacted interest rates. The 10-year Treasury bond yield has risen to over 2.25 percent, since Nov. 8th — a huge jump from its 1.4 percent level in July. That, coupled with the market’s reaction to the possibility of a stronger economy, and the probability that the Federal Reserve will hike interest rates at their Dec 13-14 meeting has skyrocketed. 
  • Not everyone can be a winner, even at Dow 19,000. Because bonds and interest-rate-sensitive stocks have an inverse correlation to interest rates, we’ve seen areas like bonds, utilities, and consumer staple stocks tumble since the election. Again, this explains why roughly a month after the election a proxy for the corporate bond market (ETF symbol LQD) was down over 3 percent, and the consumer staples ETF (XLP) was off -2 percent despite the S&P 500 up 5 ½ percent during the exact same timeframe.     

So, the next time the office conversation turns to Dow 19,000 or Dow 20,000 or Dow 100,000, just sip your coffee, nod, smile and know that, to borrow from Shakespeare, it’s all “sound and fury, signifying nothing.”