DOW 20,000: ‘COULDN’T HAVE COME A MOMENT TOO SOON’

DOW FINALLY BREAKS SYMBOLIC THRESHOLD, BUT EARNINGS WILL TELL THE REAL STORY

After flirting with the 20,000 mark for more than a month, the Dow Jones Industrial Average finally broke through the psychological barrier on Wednesday, as it continues to hit all-time highs.

More importantly, U.S. stocks on a broader basis (the S&P 500 also set a new record) appear to be breaking out of the sideways trading range in place since early December. That followed a post-election surge on the pro-growth policies of President Donald Trump.

Canadian stocks have been equally strong since the voting results rolled in on Nov. 8, with the benchmark S&P/TSX Composite Index now within striking distance of its September 2014 peak.

The rally leaves investors wondering whether breaching the 20,000-point barrier — the Dow closed at 20,068.51 — actually matters, and if the equity market’s recent strength will stick.

Since the index only includes 30 stocks, the significance of the milestone is a subject of frequent debate. But the 120-year old equity benchmark remains closely watched, as it includes everything from Goldman Sachs Group Inc., Johnson & Johnson and American Express Co., to Apple Inc., Walt Disney Co. and Exxon Mobil Corp.

“In all honestly, it couldn’t have come a moment too soon, finally putting us out of our misery so we can start to focus on something else more important,” said Michael Hewson, chief market analyst at CMC Markets.

On a more serious note, he acknowledged that while the breaking of a significant milestone does provide investors a feel-good boost, from a broader perspective, it probably doesn’t matter much.

“Of more importance, is whether or not it is able to sustain these gains at a time when U.S. stocks are already considered expensive,” Hewson said.

Markets have responded positively to the businessfriendly tone taken by the Trump administration, which contrasts with that of former president Obama’s team.

However, investors must decide how much good news to discount.

Steven Ricchiuto at Mizuho Securities noted that this issue is complicated by the fact that most of Trump’s stimulus won’t be felt until 2018, due to the often-lengthy Congressional process.

“Investors also need to take into account the abnormal timing of the stimulus, occurring well into an economic expansion,” Ricchiuto said.

He suggested that with the U.S. market trading at an estimated 19x 2016 earnings per share, stock valuations are “high, but not a bubble.”

Much of the optimism about a move higher for equities stems from an expected rebound in earnings, which faced a sharp downturn in 2016 as a result of weakness in the energy sector, stemming from very low oil prices.

S&P 500 earnings have recovered, but they’ve only matched the highs of 2014 and 2015.

Fourth-quarter earnings season for U.S. companies is off to a strong start, which has given equities a boost after several weeks of weakness.

“In our view, investors have focused too much on Trump,” said Maximilian Kunkel at UBS Wealth Management. “But it is clearly earnings that are driving the rally.”

Fourth-quarter earnings are now forecast to grow 6.8 per cent, which would be the strongest showing in two years, according to Thomson Reuters.

“The big question for us is how much of that better earnings growth, or the anticipation of it, is already reflected in prices,” said David Joy at Ameriprise Financial. “We need that earnings growth to justify the multiples where they already are.”

U.S. banks have been some of the best performers since Trump’s victory, as investors anticipate inflation and higher interest rates will follow planned fiscal stimulus.

However, these gains, along with those in other sectors, could be short-lived if the Trump administration’s policies get held up by the political process in the coming months.

Other concerns include the strengthening U.S. dollar and its impact on corporate profits, particularly multinationals, and a faster-thananticipated pace of interestrate hikes from the Federal Reserve.

“While the Dow hitting 20,000 is one of the least meaningful data points on my screen, it does suggest that the equity rally is pretty broad-based,” said Michael Purvesat Weeden & Co. “What’s important is that the Dow is going up.”