Don’t rule out Dow index topping 30K

Optimists expect smooth sailing, but some see turbulence ahead

The Dow’s milestone mania may have more room to run.

After topping 24,000 last week and briefly surging 300 points Monday on optimism that a tax overhaul plan is moving closer to reality after the Senate passed a bill over the weekend, Wall Street bulls say Dow

“25K” is pretty much a sure thing. The blue-chip stock gauge might not stop going up until headlines trumpet Dow 30,000, bulls say. And Dow “30K” — an additional 23.5% gain from Monday’s close of 24,290 — is not an unthinkable level to attain before the average peaks and enters the next bear market, or decline of 20% or more.

The Dow this year has barreled through 20,000 and four other

1,000-point milestones on its way to

64 record highs.

“This rally looks bulletproof because every area of the economy is seeing gains,” says Chris Rupkey, chief financial economist at MUFG, a New York-based bank. “Twentyfive thousand is too close, and no one sees that as a ceiling. Thirty thousand may be more likely as a stopping point.”

If the Dow’s performance in 2018 is similar to its year-to-date gain of

23%, it could reach 30,000 next year. If the market matches its longterm average annual gain of around

10%, it would surpass 30K in 2020. The Dow jumped 302 points Monday to an intraday record of

24,534.04 before closing up 58 points as investors’ moods got a boost from movement on tax cuts.

The hopes for sizable tax reductions for American corporations have been a main pillar of Wall Street’s bullish view of stocks. The Senate bill slashes the corporate tax rate to 20% from 35%. The final bill still needs to be ironed out by the House and Senate.

Bearish investors warn of turbulence ahead, citing pricey stocks, the expectation for higher rates and signs of irrational exuberance. But the Dow’s latest rally could be a sign of things to come, bulls counter.

The path to Dow 30,000, Rupkey says, will be driven by successful Dow components such as Boeing, UnitedHealth, 3M, Apple, McDonald’s, Caterpillar and Home Depot — companies that have strong earnings potential as the U.S. economy gains momentum.

“We aren’t talking Bitcoin here,” says Rupkey, referring to the highly volatile and speculative digital currency. “This handful of companies driving the rally are the heart of America. Betting against the economy is a fool’s bet.”

Getting to 30,000 before the next bear market is “a pretty tall order, but one we can achieve,” adds Chris Zaccarelli, chief investment officer at Charlotte-based Independent Advisor Alliance.

The Dow would have to fall to

19,432 from Monday’s close to enter a bear market.

It’s hard to get too negative about a market that doesn’t yet face the headwinds of fast-rising interest rates or signs of global economic weakness, adds Bill Stone, chief investment strategist at PNC Asset Management Group. Stone says stocks are expensive on a historical basis but remain attractive given the low interest rate environment.

And as Monday’s Dow surge illustrates, stocks could get a lift from corporate tax cuts. If companies pay less in taxes, it will free up cash for them to make acquisitions, buy back stock, invest more in their businesses or return money to shareholders via dividends. Credit Suisse estimates that a 20% tax rate for corporations would boost the overall S&P

500 stock index’s earnings by 10% in

2018.

But Joe Quinlan, chief market strategist at U.S. Trust in New York, says a breather for stocks would not be surprising.

He says the Dow’s high point “before this rally peters out” will be around 26,500, or

9% higher. The Dow will run into headwinds, Quinlan says, perhaps in the middle of next year, when growth overseas accelerates, causing weakness in the U.S. dollar to dissipate.

“We aren’t talking Bitcoin here. This handful of companies driving the rally this year are the heart of America. Betting against the economy is a fool’s bet.”

Chris Rupkey Chief financial economist at MUFG, a New Yorkbased bank