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Your Financial Life

What’s in a Number? Dow Reaches 20,000

DowHits20000

I was in sixth-grade on November 14, 1972, and looking back on it there was a lot going on in the world. Richard Nixon had just been re-elected by an overwhelming landslide, the Miami Dolphins were nine games into an undefeated season, and a movie called The Godfather was playing local theaters. Also, on this day the Dow Jones Industrial Average (the Dow) closed above 1,000 for the first time ever. The following day the New York Times called it the “equivalent of initially breaking the four-minute mile.”

While the Dolphins and Al Pacino would go on to do just fine over the following decade, Nixon and the Dow did not as the world had to wait until I was a senior in college for that 1,000 mark to be reached again. However, when the Dow finally made its second go-round there in September of 1982 it did not look back for years to come. It would be about three years later, when on my daily commute into work on the Boston subway, I overheard the gentleman next to me say “1,500 means I’m getting off the train.” Then he got off the train. Over those next two years, the Dow would rise another 80%.

Such reminiscence only serves as anecdotal evidence that in the world of investing, round numbers mean very little, and the Dow’s first-ever close above 20,000 will likely prove no different. While psychological milestones can seem important, we feel they should be viewed in the context of the broader market conditions surrounding them.

So with the Dow having officially reached this milestone, here are some points to consider:

  • As we discussed in the Transamerica 2017 Market Outlook , we believe this could potentially be a year of double-digit appreciation for the broad equity markets based in large part on a strong recovery in corporate earnings. It is our view that the single most important element driving stock prices is earnings growth, and in this regard stocks continue to appear well set up.
  • In addition to the prospect of improving earnings, we feel stock valuations could benefit from a friendlier and more favorable business environment. This of course would be due to pending economic policy out of Washington pertaining to lower taxes, less regulation, and more fiscal spending. In essence, we feel the long-term case for stocks is becoming more attractive.
  • We also believe the U.S. economy could currently be in a state of pent-up demand which, like a coiled spring, could expand faster than it has in recent years. Resulting from potentially higher levels of consumer and business spending in the year ahead, we could finally see U.S. gross domestic product growth exceed 3%, a rate that has not been achieved in more than a decade.
  • Higher interest rates should also lead to increasing profitability for financial services stocks and, in particular, the large money center banks. Energy stocks are also primed to once again contribute positively to the overall economy following the recent recovery in oil prices. In all likelihood, the resurgence of these two sectors of the market should help to make overall earnings math a lot easier for at least the next 12 months.
  • From a technical perspective, the Dow is continuing to break out of a previous two-year period of consolidation that ended this past November. While we are not advocates of chart-based investing as a sole criteria, this breakout does coincide with our fundamental outlook of improving corporate earnings and a pro-business environment for U.S. companies.
  • Finally, we would be remiss not to mention that bouts of short-term volatility will probably be in store for the markets even as these catalysts play out. The simple fact is that while 20,000 is just a round number, it does equate to more than a 9% rise in the Dow since the market (and the polls) closed on November 8. Bear in mind, over the past half century the market has averaged a downside correction of 10% or more approximately once every year and a half, and we believe the odds favor one occurring at some point in the year ahead.

In summary, like a person’s age, the Dow is just a number. It was a number when Don Shula and Marlon Brando were atop the sports and entertainment worlds, and it’s still just a number  today. The more important point is the health of the market at that number, and at this juncture we would say that remains pretty solid. We would rather be on this train than getting off.

About the author

Tom Wald is responsible for overseeing the investment and mutual fund product development functions and sub-adviser selection process. He also actively publicizes Transamerica’s investment thought leadership and products to advisors, clients, and the media. Tom has more than 25 years of investment experience and has managed large mutual funds and sub-advised separate account portfolios. Tom holds a bachelor’s degree in political science from Tulane University and an MBA in finance from the Wharton School at the University of Pennsylvania. He has earned the right to use the Chartered Financial Analyst (CFA) designation.

Tom Wald, CFA® Chief Investment Officer, Transamerica Asset Management, Inc

Investments are subject to market risk, including the loss of principal. Asset classes or investment strategies described may not be suitable for all investors.

This material was prepared for general distribution. It is being provided for informational purposes only and should not be viewed as an investment recommendation to purchase or sell any security. If you need advice regarding your particular investment needs, contact a financial professional.

This material contains general information only on investment matters; it should not be considered as a comprehensive statement on any matter and should not be relied upon as such. The information does not take into account any investor’s investment objectives, particular needs or financial situation.

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