Dow tops 20,000 mark after month-long tease

Last Updated Jan 25, 2017 4:15 PM EST

The Dow Jones industrial average crossed the 20,000 mark for the first time Wednesday, with the blue-chip index reaching that threshold after hovering just south of it for more than a month.  

The index crossed the line at the opening bell, following new highs Tuesday for the S&P 500 and the Nasdaq Composite index. Before trading opened Wednesday, Dow futures contracts indicated that it was likely to hit the mark at the outset.

At Wednesday’s close, the Dow was up 0.78 percent for the day, finishing at 20,068.

Boeing (BA) led the Dow’s charge right after trading commenced. It was up almost 4 percent, after announcing fourth quarter earnings that beat analysts’ expectations. Along with other military contractors, the aerospace giant is expected to do well during the Trump administration, which vows to hike defense spending. 

The run-up to Dow 20K began as the market rallied following the election of Donald Trump. The index reached the 19,000 mark on Nov. 22 and kept spiraling upward until mid-December, when it ran out of fuel. 

Expected fiscal stimulus in 2017 and beyond, lower taxes and lighter regulation of corporations under Mr. Trump was one significant spur to the Dow’s climb, along with those of other indexes. But while the S&P 500 and Nasdaq Composite went on to score new records, the Dow wavered just short of the 20,000 line. 

One reason for the delay in crossing the line has been the price-weighted make-up of the Dow index. The S&P 500 and the Nasdaq use market valuation, or the number of shares times price. Under the Dow system, however, the stocks are ranked simply by their share price -- so financial services firm Goldman Sachs (GS) has the most impact with its $233 per share price. 

Here’s how the Dow, which has gained roughly 9 percent since the Nov. 8 presidential election, has performed through Tuesday’s close:  

Goldman, the only Dow member above $200 per share, advanced by a third after the election and then settled into a trading band as the holidays approached. The financial firm logged good earnings results for 2016’s last quarter, and it shares were up 1.3 percent Wednesday afternoon.

Another reason for the Dow stall was the Dow’s concentrated nature, with just 30 stocks, compared to 500 for the S&P and around 3,100 for the Nasdaq. That means the higher priced stocks have a stronger influence than other Dow members.

“The financials, like Goldman, had a strong run with their stocks after Election Day and then pulled back” as some investors reaped profits, said John Augustine, chief investment officer of Huntington National Bank. 

“The improvement in the stock market is also good news for consumer spending,” noted Gus Faucher, PNC deputy chief economist.  “Higher stock prices boost the wealth of equity-holding households; this makes consumers more willing to spend. This, in turn, further supports an acceleration in economic growth.”

The Dow likely will keep going for a while because of the psychological boost from pushing past a milestone, said Brad McMillan, chief investment officer for Commonwealth Financial Network. When the Dow hit 10,000 in 1999, it went on to rise another 20 percent, he noted. 

The Dow is getting pricey, with its price/earnings ratio – a standard measure of stocks’ affordability – at 20.5, up from 16.7 a year ago. 

It may be that the Dow is the best index to own if Mr. Trump’s policy initiatives come to fruition. The Dow is weighted toward financial and manufacturing stocks, which stand to benefit from the president’s plans to cut regulations for Wall Street firms and return industrial jobs to the U.S.

  • Larry Light

    Larry Light is a veteran financial editor and reporter who has worked for the Wall Street Journal, Forbes, Business Week, Money, AdviceIQ and Newsday.