STOCK MARKET YO-YO’S TOWARD DOW 20,000
After soaring past 19,000, moonshot milestone may arrive sooner than forecast
Dow 19,000. Going once, going twice, gone! Do I hear Dow 20,000?
Seth Masters, chief investment officer at Bernstein Private Wealth Management who boldly predicted Dow 20,000 by 2022 in 2012 when the Dow Jones industrial average traded around 13,000 in early June, says the Dow can eclipse 20,000 earlier than he originally predicted.
“I don’t know the precise date, but we will be ahead of schedule,” Masters told USA TODAY in an interview Monday, adding the iconic blue chip stock gauge could hurdle the 20,000 milestone as early as next year. “2017? Of course it could happen in 2017.”
The Dow traded above 19,000 for the first time Tuesday and closed up 67 points to close at a record of 19,023.87.
Traveling from Dow 19,000 to Dow 20,000 is not that long of a journey, if measured in stock market miles, as each additional 1,000-point increment equates to an increasingly smaller percentage change. A 1,000-point move to 20,000, for example, equates to a gain of just 5.3%. In contrast, the Dow had to double in value from its first close above 1,000 in November 1972 to its maiden voyage above 2,000 in January 1987, according to data compiled by S&P Dow Jones Indices. Similarly, the Dow’s jump from 10,000 to 11,000 in spring 1999 marked a more sizable 10% gain.
The latest Dow breakout has been dubbed the “Trump Rally.” After Donald Trump’s surprise win in the Nov. 8 presidential election, Wall Street has been pricing in stronger economic growth and higher corporate profits in the future, due in large part to Trump’s more business-friendly and “America First” economic policies. Investors are betting if the Trump administration, with the help of a Republican-controlled Congress, follows through on its promises of lower taxes, fewer regulations on businesses, negotiating better trade deals and spending hundreds of billions of dollars to fix the nation’s aging infrastructure, it will jump-start growth — and provide fresh life for the bull market, which is coming up on its eighth birthday in March. “Trump’s election has unleashed ‘animal spirits’ that (British economist) John Maynard Keynes talked about,” says Nick Sargen, senior investment strategist at Fort Washington Investment Advisors. “Investors are hoping his policies … will boost growth and corporate profits.” That big, bullish bet has sparked a rush of investment dollars back into the U.S. market. The new case for stocks has powered the Dow to a 3.4% gain since Election Day and enabled it to take out the 19,000 milestone, nearly two years after it crossed the 18,000 threshold Dec. 23, 2014. Still, Sargen counters there are headwinds on the horizon. “For the time being, investors are ignoring the spikes in bond yields (the 10-year Treasury note is above 2.3% for the first time in a year) and the dollar (up 10 of the past 11 sessions), which should have a dampening effect on the rally at some point,” says Sargen, adding a market scare related to Trump-inspired protectionism could also hurt the bullish vibe. In 2012, when Masters shocked the world with his provocative Dow 20,000 call, investors — still spooked by the financial devastation of the Great Recession and worst stock market decline since the Great Depression — were in a defensive shell. They were shifting their money out of stocks into safer investments such as cash and bonds. In contrast, Masters at the time was bullish on stocks due to
“Investors are hoping (Donald Trump’s) policies … will boost growth and corporate profits.” Nick Sargen, senior investment strategist at Fort Washington Investment Advisors
the bearish investor sentiment and his view that earnings and the economy would grow at a decent clip. He also argued that stocks weren’t expensive when record low bond yields were taken into account.
“Investors were very, very pessimistic then,” Masters recalls. “The idea that the Dow could get to 20,000 seemed far-fetched.”
Today, investor sentiment has brightened. And with Corporate America continuing to buy back large helpings of its own stock, Masters sees corporate earnings growth coming in at a pace of 4.5% to 5%. “In that kind of environment, in the next few years you will see mid- to single-digit returns for stocks, so within a few years you get to Dow 20,000.”
So if the Dow hits 20,000 soon, before Masters’ 2022 prediction, will the Dow be a buy or a sell? It depends on the reason the Dow is breaking out, Masters argues.
“If we get to Dow 20,000 because sentiment gets hugely optimistic and price-to-earnings ratios (or the market’s valuation level) rise a lot, I would be worried,” Masters says. “If we get there because corporate earnings are grinding higher I would be happy and would be telling people to stay the course and remain invested in the Dow.”