How long will Dow be stuck?
History suggests index stalls after milestones
“There are a few warning flags, but not enough to cower in the corner, clutching wads of cash.”
Price ceiling or launching pad? That’s the question investors are asking after the Dow Jones industrial average cracked the 20,000 barrier in late January.
Despite all the hoopla and media coverage, history suggests that major milestones such as Dow 1,000, Dow 10,000 and now Dow 20,000 might not add up to the bullish storyline many investors might imagine.
A review of past performances around what Wall Street dubs “big, round numbers” such as Dow 20,000 delivers a dose of reality.
The Dow briefly crossed 1,000 for the first time in January 1966 but didn’t close above it until Nov. 14, 1972, then didn’t break free from 1,000 and above it for good until 10 years later in December 1982. The bottom line: The Dow traded near or below 1,000 for 16 years and was bludgeoned by the bear market in 1973-74 along the way.
Dow 10,000 tracked a similar pattern of euphoria and despair. After the Dow’s first close above 10,000 in March 1999 during the dot-com stock boom, the Dow gained 17% before topping in early 2000. It then suffered through two major bear markets that saw drops of 38% and 54%. The Dow didn’t regain the 10,000 level for good until August 2010 and hasn’t traded below that level since. The takeaway: The Dow traded around 10,000 for more than 10 years.
“These major milestones have marked notable hesitation points in history,” notes Todd Salamone, senior vice president at Schaeffer’s Investment Research.
Market milestones are often reached after big price run-ups in the stock market that propel indexes such as the Dow to record highs, push stock values into the pricey range and give pessimistic investors a good reason to sell.
That’s why the question of where the Dow goes from here keeps coming up on Wall Street — especially after the Dow’s first foray above 20,000 lasted three days before sinking below the milestone the past four sessions. The case for Dow 20,000 as a barrier can’t be ruled out.
“Will the Dow suffer as it did in the aftermath of the tech bubble, floundering for a decade before finally leaving 20K in the dust? Does the market follow that same script?” Paul Nolte, senior portfolio manager at Kingsview Asset Management, wrote to clients.
It’s impossible to predict, but there are some risks to consider.
For one, though tech stocks were the main sector that was
Paul Nolte, Kingsview Asset Management
wildly overvalued at the market top in 2000, “wide swaths of the market are trading well above historical normal valuations,” Nolte says. Although Wall Street is betting on President’s Trump policies to goose the economy and corporate earnings, such as cutting taxes and improving the business environment for U.S. companies, there’s always a chance the high expectations won’t be met, causing the market to retrench, he says.
“There are a few warning flags but not enough to cower in the corner, clutching wads of cash, waiting for the storm to pass,” Nolte told clients.
A more bullish point of view comes courtesy of Alan Skrainka, chief investment officer at Cornerstone Wealth Management. He tells USA TODAY that the fact the Dow has hit milestones of 1,000, 10,000 and 20,000 is clear proof that the stock market’s long-term direction continues to be up, not down.
“All ceilings or ‘trading ranges’ are temporary if viewed with a long-term perspective,” Skrainka says. “Pull out any long-term chart of the stock market, and you’ll only see one pattern — the long-term rising trend.”
Skrainka says, “If you’re a longterm investor, Dow 20,000 will likely seem like a very small number in 10 years, even smaller in 20. At 6% annual price appreciation (the historical average), the Dow will likely double every 12 years.”
Don’t confuse or compare 2017 with the period from 1966 to 1982, which was unusually terrible for the market because of soaring inflation and interest rates, Skrainka says. He stresses that 1999 was the “highest valued market ever.”
That bullish theme was seconded by Bruce Bittles, chief investment strategist at Baird.
“(The market is) certainly not bubbly,” Bittles says. “What we are witnessing is the result of a pro-business, pro-USA administration. I think the euphoria over the economy should be embraced because that should translate into spending and investment.”