The Dow Jones Industrial Average closed at 25,075.13 on Thursday, January 4, 2018, marking the first time the DJIA closed above 25,000. Less than one year earlier, on Wednesday, January 25, 2017, the DJIA closed above the 20,000 threshold.
Throughout 2017, we saw the market reach a lot of record highs. In fact, last year the DJIA set 71 all-time highs, besting the previous record of 69 set in 1995.
Nonetheless, all those records are starting to worry some investors. But rather than focus on record highs as potential warning signs, let’s examine the history of the DJIA, how we got to 25,000 and where we might be going.
The Dow Jones Industrial Average is a stock market index used to assess movements in the US market and its overall strength or weakness. It was created in 1896 by Wall Street Journal editor and co-founder of Dow Jones & Company, Charles Dow.
The Dow tracks the market performance of 30 American large-cap companies. Initially, the Dow had only 12 stocks and these included such golden oldies as American Cotton Oil Company, U.S. Leather Company, and Distilling & Cattle Feeding Company. In 1920, the Dow expanded to 20 stocks and then to 30 stocks in 1929. And since 1929, the composition of the Dow’s 30 stocks has changed over 50 times.
Due to its age, the Dow Jones Industrial Average represents a continuous chart of our nation’s economic growth, along with its ups and downs. And every time the Dow crosses one of those “big-round number” milestones – whether 5,000 or 10,000, or 25,000 – it is met with great enthusiasm.
But the reality is that those “big-round numbers” have little significance, other than maybe a psychological impact on investors. Let’s look at some of the Dow’s milestones.
DJIA Milestones Through the Years
The DJIA first closes above 1,000
- Atari releases PONG
- Average income per year is $11,800
- Average cost of a new house is $27,750
- Cost of a gallon of gas is 55 cents
- Watergate scandal
January 1987 (15 years later):
The DJIA closes above 2,000
- Fox broadcasting makes its prime-time TV debut
- Average income per year is $24,350
- Average cost of a new house is $92,000
- Cost of a gallon of gas is 89 cents
- Markets drops 22.6% on October 19, 1987
February 1995 (8 years later):
The DJIA closes above 4,000
November 1995 (Later that year):
The DJIA closes above 5,000
- Michael Jordan returns to the NBA,
ending his retirement
- Average income per year is $35,900
- Average cost of a new house is $113,150
- Cost of a gallon of gas is $1.09
- Oklahoma City bombing
March 1999 (4 years later):
The DJIA doubles and closes above 10,000
- Euro introduced in 11 countries
- Average income per year is $40,810
- Average cost of a new house is $131,750
- Cost of a gallon of gas is $1.22
- West Nile virus first appears in the US
May 2013 (14 years later):
The DJIA closes above 15,000
- Twitter goes public
- Average income per year is $51,017
- Average cost of a new house is $289,500
- Cost of a gallon of gas is $3.80
- US officials admit that the NSA illegally collected emails between US citizens
January 2017: The DJIA closes above 20,000
January 2018: The DJIA closes above 25,000
But how did we get to 25,000 so early in 2018?
It’s the Economy, Of Course
No matter your political affiliation, by most measures, the US economy is currently on strong footing. Corporate earnings are improving, consumer optimism is increasing, interest rates are low, and unemployment numbers are low and stable. That doesn’t mean everything is rosy, however. In fact, there are still plenty of global and political risks to worry about.
All-time Market Highs are Not a Sell Signal
But just because the markets have reached new heights, it does not mean you should automatically sell out of equities. If you adopted that strategy over the last few years, you would have missed a lot of gains, because the US stock market has set a record high in each year since 2013.
In addition, while US stocks are getting all the news coverage, there are other core asset classes that are not trading at all-time highs. Of course, you should not invest in an asset class just because it is trading less than its high-water mark.
This is why we look at your asset allocation every year (or when you have had a significant life change). With advances in certain asset classes and declines in others, there is a good chance that your asset allocation is out of alignment with your goals and
Caution is Always Healthy
New high-water marks aside, US stocks have enjoyed an almost 9-year bull market. And generally speaking, drops of 10% in the S&P 500 occur about once per calendar year, and there is no reason to believe that 2018 (or any year afterwards for that matter) will be any different.
Declines of 20% or more – known as bear markets – tend to occur when the economy is contracting and in a recession – a less likely event in 2018. But a few years from now? Who knows. Hence the need to always be well-diversified.
When will the Dow reach 30,000? 100,000?
The short answer is: no one knows. Let me repeat that: nobody knows. Again, for my compliance department: NO ONE KNOWS.
But let’s do some simple math: the DJIA was half of where it is now in May 2012 – and in less than 6 years, it doubled. So, could 50,000 be passed in the summer of 2023 and 100,000 in the early part of 2029?
Asked another way, do I think that the DJIA will cross 100,000 in eleven years? I have no idea. But I’m reminded that in February 1995, the Dow closed above 4,000 and 22 years later, it was 5x that.
And interestingly, 22 years from now will be 2029. Which means maybe the DJIA will close above 125,000 in 2029? Who knows?
In the meantime, I’ll continue preaching diversification as part of a well-thought out financial plan.
This material contains forward‐looking statements that are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Actual future results and trends may differ materially from what is forecast. It is not possible to invest directly in an index.