It seems like only yesterday that the Dow Jones Industrial Average (Dow) first pierced the psychologically important 10,000 mark. I remember gathering around the office televisions on March 16, 1999, to watch the Big Board move into five-digit territory for the first time. Wall Street traders erupted in cheers and paid homage to the old ticker-tape days by throwing confetti into the air. Investors donned “Dow 10,000” hats while analysts and pundits predicted a prolonged era of stock market gains and rising prosperity.
At the time, Dow 10,000 seemed destined to one day be as outdated as Y2K or Ricky Martin or optimism for the newly introduced euro. Alas, time flew but the market didn’t.
When the Dow once again crossed 10,000 on October 15, 2009, and then again on October 19, 2009, it was met with minimal fanfare. No one gathered around the televisions and the response at the New York Stock Exchange was generally muted. We had already landed on that moon. It was the 25th and then 26th time we had closed above that previously iconic number and, by late 2009, 10,000 represented a greater than 40% decline from the all-time high.
What New Market Highs Don’t Tell Us
Given this history, some investors might rightly view Dow 20,000 with trepidation.
- New highs offer very little information in and of themselves. It is far more interesting to compare the price of the index to the fundamental characteristics (earnings, sales, book value) of the companies in which they invest. For example, in 1999, the Dow at 10,000 was trading at nearly 30x the earnings per share of the index, representing a once-in-a-generation high. The next time we crossed 10,000 the market was trading at 12x earnings, representing the lowest valuations in nearly 40 years. Today, valuations are somewhere in the middle of those two extremes.
- A new high is not in itself any kind of danger sign. Stock market averages are not mean-reverting. They are a mirror on a growing economy for the U.S. and the world. If you believe that the world will continue to get better for most inhabitants of Planet Earth then you should expect markets to trend upward over long periods.
Finally, as I alluded to in my blog Inaugural Thoughts on Investing, the S&P 500 Index (a broader market representation than the Dow) has hit 964 new highs since its 1957 inception, including 18 new highs in 2016 alone (Exhibit 1).
And while yesterday’s S&P 500 Index new high of 2293.22 is not as headline grabbing as Dow 20,000, it is equally as noteworthy and just as uninformative.
I, for one, am not going to party like it is 1999. Rather I will rest assured believing that in my lifetime the markets will continue to ascend to new highs, even if the path isn’t always a straight one.
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