Dow at 20,000? Don’t believe the hype
The Dow Jones Industrial Average came tantalizing close to 20,000 on Jan. 6, a record level that is being closely watched (and hyped) by the financial media. At one point during the trading session, it was within 0.37 points, or 0.0002 percent.
Most agree that it is just a matter of time before this milestone is attained. The longer-term significance, however, is subject to more debate.
Let’s start by acknowledging that the DJIA is far from comprehensive when it comes to analytical content. The index covers a very narrow set of stocks and therefore is lacking in representation. Its calculation methodology also is problematic, placing way too much emphasis on the absolute share price, as opposed to market capitalization. As a result, a few names can move the index significantly — as has occurred recently with Goldman Sachs and JPMorgan Chase, which account for a substantial part of the upward surge since early November.
Nonetheless, the Dow is heavily mentioned when it comes to headline information about stock market performance. Moreover, it is not the only U.S. flirting with record levels. The more representative Standard & Poor’s 500 and Nasdaq are at or near their all-time highs. Accordingly, assessing the implications of the hype about the Dow reaching 20,000 comes down to evaluating the volume of the signal, the influence on investing and business behaviors, and the implications for economic governance.
We should have little doubt about the signaling outcomes. Dow 20,000 will be the stuff of front-page headlines of both general-interest and financial newspapers, and will be a trending topic in social media. Photos of celebratory hats and banners will be published widely. And the majority of market professionals will remember where they were when this milestone was attained.
Many hope that all this will act as a catalyst for wider participation of the general population — and millennials in particular — in stock ownership. After all, a bigger investor base is the best contributor to a fundamentally healthy and less volatile market. The problem is that it may take a lot more than headlines and social media likes for this to happen.
At the most fundamental level, Dow 20,000 does little to reduce the general mistrust of the financial establishment that was heightened by the 2008 global financial crisis and its aftermath. Still too many people believe that the financial markets are “rigged” to benefit “insiders.” Moreover, the stock market’s strong performance stands in stark contrast to the general malaise and unsettling feelings resulting from too many years of low and insufficiently inclusive growth, along with an unusual level of uncertainty regarding economic, financial and political conditions.
The same caution is also warranted when it comes to “animal spirits” in the corporate sector. The exuberance associated with the impressive post-election surge in stocks has, until now, been mainly a financial phenomenon. It has made it easier for companies to issue bonds, but has yet to translate into consequential changes in business investment and other productivity-enhancing behaviors that fuel more durable drivers of corporate profitability and economic growth. And this is unlikely to change just with the attainment of a financial milestone.
The most consequential immediate impact of Dow 20,000 may in fact have less to do with broadening the investor base and turbo-charging productive business behavior, and more to do with encouraging politicians to step up to their economic governance responsibilities. After all, politicians like to be popular.
The main reason the Dow is so close to this record level is the combination of pro-growth policy announcements by the president-elect and the hope that a less-dysfunctional Congress will act on these proposals. Politics can help change market and economic sentiment and, with that, set up a more enabling environment for growth. Indeed, the real hope for investors — and, more importantly, the broader economy — is that this financial milestone ends up helping to encourage and empower a Congress that, for too many years, has failed to step up to its economic governance responsibilities.