The Dow Breaks 20,000: What Happens Next?

Is it just a number, or does cracking through a milestone mean something for the market?

The Dow Jones Industrial Average(DJINDICES:$INDU) is over 20,000! The media is lauding this feat, but should investors break out party hats and noisemakers? Is it a real accomplishment, or just a number?

 

Dow 20,000 makes for some nice headlines, and it’s a psychological accomplishment — but not necessarily a lasting one. What goes up does not always come down — but past history shows that, at least recently, the Dow reaching milestones often can lead to a small market hangover.

What happens next?

Historically, after the Dow clears one of these hurdles, there tends to be a short-term pullback. That’s happened after four of the five most recent milestones were crossed. However, there’s no guarantee that will happen here because of what’s fueling the rally.

In this case, stocks are rocketing higher due to optimism over what will happen when President-elect Donald Trump takes over. The market has risen since Nov. 9, after it became known that the businessman/reality-show host had won the election. Since then, Trump has signaled that he will likely ease regulation and lower business taxes. He has also named a number of Wall Street insiders and billionaires/business leaders to his cabinet, including the surprise pick of ExxonMobil CEO Rex Tillerson for Secretary of State.

These moves can be debated from a political point of view, but they definitely have been stock market drivers. That’s the news behind the push to 20,000. And, since nothing is likely to change how people feel about Trump until he actually has been in office for at least a little while, the rally may continue beyond 20,000. Because Trump is something we have never seen before — a president-elect with a business background and no political experience — we have no idea what might happen because there is no precedent. A reality check could wipe out these gains built from optimism, or performance as President could reinforce the reason why people have been sending the Dow higher since the day after the election.

Does 20,000 mean anything?

In practical terms, 20,000 means nothing. It’s just a round number, and it’s easier to celebrate those than picking a random one. For example, nothing changes about your car when it crosses from 99,999 to 100,000 miles, but it still feels like an occasion. Round numbers are simply easy to digest, which is why Jules Verne’s famous book was called Twenty Thousand Leagues Under the Sea and not 19,845, or some other more exact figure.

Another reason for the hullabaloo around the Dow reaching 20,000 is that it reminds people about their investment holdings, and that can be a good thing. Breaching 20,000 is sort of like the Oscars for stocks. A burst of publicity gets people to pay attention to things — whether it’s their investment holdings or films not involving superheroes — that they otherwise mostly ignore.

Milestones come faster now

In some ways, the Dow breaking a record has become about as significant as an NFL receiver finishing a season with over 1,000 yards. That used to be a rare achievement — but as football has become pass-happy, it’s an achievement that has become a lot more common and a lot less special.

The same is true of the Dow, though you wouldn’t know it because the sheer amount of media attention makes it seem like 20,000 is a bigger deal than it actually is. The milestones have happened much faster in recent years. It took the Dow Jones Industrial Average, which was started in 1896, a decade to close over 100, then nearly 66 years to close over 1,000 (which it did in November 1972). The Dow reached 15,000 in May of 2013, while 19,000 was reached about a month ago. That makes 20,000 an event because it’s a big round number, but the roughly 14 years between Dow 10,000 (March 1999) and 15,000 made that a bigger deal than the three-plus years between 15,000 and 20,000.

Really, it’s not a big thing

While it’s fun to celebrate numbers like this, in reality, it’s just a number. Stocks are rising partly due to what people think will happen under Trump, and in part, because the so-called “Santa rally” generally pushes stock prices higher in December.

Have fun with Dow 20,000. Toast the achievement, and cheer now that the final bell has rung. Just remember that, as far as your long-term investment decisions go, it’s a meaningless milestone, an arbitrary “achievement” that, in actuality, means very little — or nothing at all.

Daniel Kline has no position in any stocks mentioned. The Motley Fool owns shares of ExxonMobil. The Motley Fool has a disclosure policy.