Yesterday, with the usual fanfare and breathless commentary from the financial media, the Dow Jones Industrial Average, the dean of US equity indexes, crossed 20,000 points. Is this significant, and if so, where does the market go from here?
In short, no, on its own it is not significant. Market watchers imbue these big round numbers with magical properties, but there really is nothing intrinsically wonderful about 20,000. Numbers that were more important in recent months and years were 18,000 (rounded), which the DJIA could not seem to shrug off from late 2014 until just this past October, and 16,000 (also rounded), which the average kept revisiting from as long ago as late 2013. That represents about 12.5% of return that kept coming and going for more than two years. The meaningful moment was when the DJIA broke out of that band in early November of 2016 and never looked back at it.
These points of support and resistance correlate to similar points in other indexes that represent the same market, but since each index provider uses a different methodology to arrive at their respective indexes, the actual numbers are largely irrelevant and it is the percentage change between them that is where the real information resides. For example, yesterday’s DJIA close was 20,068. The S&P500, also representing US large capitalization stocks, closed at 2298, while the NYSE Composite Index closed at 11,339 and the NASDAQ Composite closed at 5,656 (all figures Bloomberg LP).
Why is there not much information in those numbers in and of themselves? Because context is everything. Is 20,000 a good price or a bad price for those 30 companies? What are their earnings? What are their growth prospects? The same questions asked in supermarket terms — Is $20 a good price or a bad price for peanuts? Well, is it a jar of peanuts or a sack of peanuts? Are they roasted and salted or chocolate-covered? We cannot say whether $20 is fair value for the peanuts without more information, but we can definitely say $20 is more than $18, and if we buy those peanuts, whatever their attributes, at $18 and then sell them at $20 we made a tidy profit.
For us, the most recent important number on the Dow was 17,888, which was the point it briefly dropped to immediately prior to the US election. We have seen the price of the 30 companies in the Dow collectively increase (according to the formulation of the index) by a little more than 12%. Sound familiar? We are seeing strong evidence that market participants believe in the growth story of a Trump economy and investors have been well paid for being invested since the market turned that corner in November. Our tactical position has favored the US based on our analysis that our home market presents the best opportunities and the fewest structural risks globally. However, even good markets take breathers, and the US traded inside a 12% interval for an extended period of time before this last move. The question on our minds is not whether 20,000 was a significant milestone, but whether 10 – 12% of price return in two months’ time represents a fully realized repricing of the market, a first leg of a longer climb higher, or too much too fast with too many yet to be understood risks of a new US reality. The next several weeks will be telling from both fundamental and technical perspectives.