Putting Dow 20,000 Into Context
Thursday, January 26, 2017

Trying to put the Dow Jones industrial average’s rise above 20,000 into context is not easy. In the grand scheme of things, 20,000 is no more significant than, say, the first time the index crossed above 19,600 or any other random number. It just feels important and has been getting much attention (not to mention hats) because 20,000 is a big, round number. As I explained last month, our brains like to take easy-to-remember numbers and compare them to other easy-to-remember numbers, such as 10,000. Nonetheless, since Dow 20,000 has attracted much attention, some attempt at providing context is warranted.

To begin with, crossing the last 100-point gap turned about to be nearly as difficult as ascending the Hillary Step is for a fatigued climber (the Hillary Step is located just below the summit of Mount Everest). The blue-chip average spent 28 trading days trying to get from 19,900 to 20,000. Jamie Farmer of S&P Dow Jones Indices said the Dow spent more days trying to climb up the last full 100 points than it had during any of the previous 1,000-point moves between 10,000 and 19,000.

In terms of how long it took to double, nearly 18 years have passed since the Dow Jones industrial average first reached 10,000 on March 29, 1999. This equates to a gain of just under 4% per year on an annualized basis. To provide insight as to whether this is historically good or bad, I reached out to Howard Silverblatt, the senior index analyst at S&P Dow Jones Indices.

Silverblatt’s data shows the Dow as historically having doubled in value (100-200, 200-500, 500-1000, 1,000-2,000, 2,000-4,000, etc.) at an average pace of once every 15.4 years. (Yes, I know 200 to 500 is an 150% increase, but that was in the data.) The average annualized gain between doubles was 8.97%. Included in the average is the long 28-year stretch between Dow 200 and Dow 500 (December 1927 to March 1956) and the very short 2.4-year stretch between Dow 4,000 and Dow 8,000 (February 1995 to July 1997). The latter double was equivalent to a 33.8% annualized gain, excluding dividends.

Silverblatt calculated the annualized gains between milestones. He started with Dow 40 (May 1896), used Dow 100, Dow 200, and Dow 500, before switching to 1,000-point increments. The average annualized gain between milestones was 22.8%, with a median of 11.0%. Skewing the average upward is the 35 days it took the Dow to rise from 10,000 (March 29, 1999) to 11,000 (May 3, 1999). I’ve posted Silverblatt’s data below.

What’s notable about the changes in milestones, particularly the 1,000-point moves, is that there isn’t a definitive trend in the annualized gain between milestones. Unlike the percentage change between milestone numbers, the annualized returns consider the amount of time it took the Dow to reach the next level. Bull markets led to shorter periods, and therefore higher annualized gains. Bear markets led to longer periods, therefore lower annualized gains.

Since the historical data gives us interesting—but not useful—context, the alternative is to look at valuation. Valuation answers the question as to whether the Dow is cheap or pricey. Rodrigo Campos and Chuck Mikolajczak of Reuters said yesterday that the Dow's trailing price-earnings valuation was 20.6. They described the current P/E ratio as being the highest it has been in over seven years. It’s worth noting that the S&P 500, which gives a bigger weighting to the 30 Dow components because of their market capitalization, is trading at an above-average valuation of 19.2 times earnings.

Beyond the current valuation, it’s hard to draw conclusions from the data. We can tell that it was a long ride up from the first crossing of 10,000 to 20,000, but not unusually so. We can also see that there are rewards for sticking with stocks even when there have been periods of frustration in between milestones. (Dividends can help you cope with this frustration.) The current price-earnings ratio implies that stocks are on the pricey side, but stocks can get more expensive and/or benefit from earnings growth. Perhaps the biggest thing is that though Dow 20,000 has made headlines, crossing the milestone is not by itself anything worth reacting to.

The Dow’s First Close Above Each Milestone

Date Close Days Between Milestones Annualized Gain
5/26/1896 40.94 -- --
1/12/1906 100.25 3,884 8.8%
12/19/1927 200.93 8,011 3.2%
3/12/1956 500.24 10,311 3.3%
11/14/1972 1,003.16 6,091 4.3%
1/8/1987 2,002.25 5,168 5.0%
4/17/1991 3,004.46 1,560 10.0%
2/23/1995 4,003.33 1,408 7.7%
11/21/1995 5,023.55 271 35.8%
10/14/1996 6,010.00 328 22.1%
2/13/1997 7,022.44 122 59.4%
7/16/1997 8,038.88 153 38.1%
4/6/1998 9,033.23 264 17.5%
3/29/1999 10,006.78 357 11.0%
5/3/1999 11,014.69 35 172.2%
10/19/2006 12,011.73 2,726 1.2%
4/25/2007 13,089.89 188 18.2%
7/19/2007 14,000.41 85 33.5%
5/7/2013 15,056.20 2,119 1.3%
11/21/2013 16,009.99 198 12.0%
7/3/2014 17,068.26 224 11.0%
12/23/2014 18,024.17 173 12.2%
11/22/2016 19,023.87 700 2.9%
1/25/2017 20,068.51 64 35.7%

Source: Howard Silverblatt, S&P Dow Jones Indices

More on AAII.com

Highlights from this month's AAII Journal

The Week Ahead

Fourth-quarter earnings season continue to stay busy with 109 members of the S&P 500 scheduled to report. Included in this group are Dow Jones industrial components: Apple (AAPL), Exxon Mobil Corp. (XOM) and Pfizer (PFE) on Tuesday and Merck & Co (MRK) and Visa (V) on Thursday.

The Federal Open Market Committee will hold its first meeting of 2017, starting on Tuesday. The meeting announcement will be released at approximately 2 p.m. on Wednesday. No change in interest rates is expected. The CME’s FedWatch Tool is showing traders not pricing in a rate hike until at least the May meeting. These expectations are very much subject to change.

Elsewhere on the economic calendar, December personal income and spending and the December pending home sales index will be released on Monday. Tuesday will feature the November Case-Shiller home price index, the January Chicago purchasing managers’ index and the Conference Board’s January consumer confidence. The January ADP Employment Report, the ISM’s January manufacturing index, December construction spending and the January PMI manufacturing index will be released on Wednesday. Thursday will feature fourth-quarter 2016 productivity. January jobs data—including the change in nonfarm payrolls and the change in the unemployment rate—December factory orders and the January ISM’s non-manufacturing index will be released on Friday.

Chicago Federal Reserve bank president Charles Evans will speak on Friday.

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  3. Interest Rate Sensitivity and Bond Pricing
AAII Sentiment Survey

The percentage of individual investors describing their short-term market outlook as "neutral" is at its highest level since the election, according to the latest AAII Sentiment Survey. Pessimism is also higher, while optimism has continued to pull back.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 5.4 percentage points to 31.6%. Optimism was last lower on November 2, 2016 (23.6%). The historical average is 38.5%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rose 4.6 percentage points to 34.9%. Neutral sentiment was last higher on November 2, 2016 (42.0%). This is just the third time neutral sentiment has been above its historical average of 31.0% since the election.

Bearish sentiment, expectations that stock prices will fall over the next six months, edged up 0.8 percentage points to 33.5%. Pessimism was last higher on November 2, 2016 (34.3%). This is the first time that bearish sentiment is above its historical average of 30.5% on back-to-back weeks since the election.

Since starting 2017 at 46.2%, bullish sentiment has pulled back by a cumulative 14.6 percentage points. Over the same period, neutral sentiment and bearish sentiment have risen by 6.4 and 8.3 percentage points, respectively. (The numbers are rounded.) All three of the indicators remain within their typical historical ranges.

As I discussed last week, the record highs set by the NASDAQ have drawn a mixed reaction, with some individual investors viewing it as a positive and others viewing it as a sign that the market is overvalued or at risk of pullback. The survey period runs Thursday through Wednesday, and many of this week’s votes were recorded before the Dow Jones industrial average rose above 20,000 yesterday.

The potential impact that President Trump could have on the economy is causing uncertainty or concern among some investors, but encouraging others. Also influencing investor sentiment are valuations, earnings, consumer sentiment and the magnitude and timing of future interest rate increases.

This week’s special question asked AAII members what investment changes they are making in reaction to the new presidential administration. Most respondents can be categorized as belonging to one of three distinct groups. Nearly 31% do not intend to make any change, with some saying that they follow a long-term approach and others waiting to see what policy changes emerge from the Trump administration. Slightly more than 28% are buying or intend to buy stocks. Financials and industrials were most commonly listed, followed by technology, defense, small-cap and mid-cap stocks. An additional 28% of respondents say they are either selling out of certain stocks or are otherwise moving to/staying in cash.

Here is a sampling of the responses:

  • “Increased exposure to the financial sector, as well as building and construction.”
  • “Sticking to my asset allocation and overall financial plan.”
  • “I am not making changes because of the presidential election.”
  • “Expect the defense sector to do well.”
  • “We’re holding cash that we otherwise might have invested.”


This week’s Sentiment Survey results:

Bullish: 31.6%, down 5.4 points
Neutral: 34.9%, up 4.6 points
Bearish: 33.5%, up 0.8 points

Historical averages:

Bullish: 38.5%
Neutral: 31.0%
Bearish: 30.5%
Take the Sentiment Survey.

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