Dow hits 20,000: a milestone to mark the progress of returns

It’s been said that economists only use decimal points to show they have a sense of humor. By that idea, the Dow already hit 20,000 on January 6th when the high tick of the day was 19,999.63, just a few tenths off. But sometimes those even round numbers are not a problem.

The Dow Jones Industrial Average soared right through 10,000 in 1999 with ease, even if it did fall back a few times over the next decade. Other times, though, round numbers are a kind of barrier, as 20,000 has been for a few weeks. In the distant past, the Dow first came close to 1,000 when it hit 995.14 in February 1965. It approached that number again in November 1968, surpassed it slightly for a few days in 1972, 1976, 1980, and 1981, but never had enough momentum to follow through. That level was a real obstacle for 17 years before investors finally powered through it (hopefully for the last time) in October 1982.

In retail, zeros are anathema. Have you ever seen a gas station advertise a price of $2.00 per gallon? Never; it’s always $1.99.9, or $2.01.9. The goals of retail and investment, of course, are different. The former wants its prices to look as cheap as possible, while investors want stock prices to be higher.

Dow 20,000 is simply a milestone to mark the progress of returns. That progress has been outstanding since 2009. From a few ticks below Dow 6,500 in March 2009 to essentially 20,000 at the New Year 2017, that’s a 15.5% annualized gain in price for each of nearly eight years. With reinvested dividends, the annual return was 18.4%.

From a longer-term basis, the progress has also been substantial. The Dow Industrials first surpassed 100 in January 1906. From there to today, the Dow is up 200 times in price. Using the S&P 500 as a Dow proxy gives a total annualized return with reinvested dividends over that 111-year-period of 9.4%.

The question for investors, of course, is not merely whether the Dow can surpass 20,000, it’s whether those excellent returns since March 2009 will continue. The answer is most likely yes, at least for a while. Stock indices are driven by profits and valuation. Stock values are currently pretty high, with the ratio of the price on the S&P 500 Index to twelve-month trailing earnings (using projected earnings for the fourth quarter) of 22.5. That’s above the high of about 20 during the bull market apex of the early 1970s. It’s well below the super-high valuation at the peak of the tech bubble in 2000. Still, it’s unlikely that stock prices will advance because of higher valuations.

That leaves profits. Fortunately for investors, profit growth is coming back and earnings on the Dow and the S&P 500 Index can likely propel prices on both indices higher yet this year. The U.S. economy is in an excellent spot, with solid job growth, consumer and business confidence at newly high levels, mild inflation, and green shoots of capital spending beginning to emerge. With 20,000 now out of the way, more price gains should be in the offing.


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