Investing

What the Dow Hitting 20,000 Really Means

Last week the Dow Jones Industrial Average reached a new milestone, surpassing 20,000 for the first time ever. This achievement was quickly heralded by observers (who had been eyeing it for weeks following some close calls) as well as by President Trump who said he was “very honored” by the accomplishment. At the same time many have pondered whether the fanfare surrounding the event may be a bit overblown.

So what does the Dow reaching 20,000 really mean? Here a couple of things to consider:

The Dow is outdated

One of the largest criticisms that skeptics have lobbed at the Dow is that the index is simply not as significant as it once was. For one the average is made up of less than a few dozen companies — 30 to be exact. While the list of those who are included has been updated and evolved over the years, the truth is the method the index weights companies by stock price means it may no longer be the best indicator of the overall market.

As a result several analysts have since turned their attention primarily to the S&P 500. Like its name implies, this index is comprised of far more stocks but also weights them by market value as opposed to price. Thus, while it may be less well-known to laymen than the Dow is, the S&P 500 has taken over as the preferred market index for many.

To be fair to POTUS and others, the S&P 500 has also seen a significant rally since the election of Mr. Trump and continues to reach all-time highs. That said the discussion lately has not been “is the market doing well?” but “is Dow 20,000 really a big deal?” On that latter point, as our President might phrase it, many many people are saying “not so much.”

Financial stocks added a big boost 

Even if you don’t follow finance all that closely, there’s a good chance you’ve heard about Goldman Sachs a lot over the past decade. From the banking crisis to Secretary Hillary Clinton’s speeches to some of President Trump’s cabinet picks, it seems the company just manages to pop up all over the place. Incidentally they also had a big hand in the Dow’s race to 20,000.

Goldman’s stock has been surging in recent weeks, most likely due to the promise of deregulation under the Trump administration. As MarketWatch notes, this increase has accounted for nearly one-third of the DJIA’s rise from 19,000 to 20,000. Again, while other companies in the index contributed as well, the effect of Goldman — along with banking giant JPMorgan Chase, which is also included in the Dow — is an important piece of the story.

To be sure, the Dow Jones reaching 20,000 points is a milestone. Furthermore the short term performance of both the New York Stock Exchange and NASDAQ have been impressive. However celebrating the Dow’s achievement as a major victory or using it to point to the economic prospects of the next four years may be a bit premature and/or overstated. After all, just as many travelers learned this past weekend, things can change very quickly these days.

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