The Dow Jones Industrial Index is close to breaking 40,000. If it were to cross this threshold, not only would it be another all-time high, but it would also represent a symbolic recovery from a tumultuous 2022. These milestones are lauded as historical events, but the punditry on what investors should do next is usually mixed.
Some warn to take profits before it’s too late. No greater cautionary tale can be cited than the months after the Dow broke 2,000 back in 1987, the Dow began the year at 1,896 and then staged one of the most impressive runs in history, surging nearly 44% to 2,722 in late August. Days later, it reversed and dropped nearly 1,000 points in two months. The selling fury plateaued with a 23% crash on October 19th, which lives in infamy as “Black Monday.”
But others see these milestones as validation of today’s market and the foundation for future opportunities. Crossing them only adds fuel to the engine of growth. It’s a psychological level that will ignite even more confidence in a market that wants to go higher.
Once again, we are faced with opposing opinions that make equally compelling cases. What is an investor to do?
The answer may become more apparent after looking at the data in the chart below. Since 1955, there have been 1,120 trading days when the Dow closed at an all-time high1. That averages out to be just over 16 per year or more than one for every month.
|Source: Bloomberg, Darwin Asset Management analysis
Regarding the S&P 500, there have been 1,228 trading days when the index closed at an all-time high1. That averages to 18 per year. Why would the 1,121st and 1,229th all-time highs be special? What could either signify that the prior ones could not?
Several years saw so many all-time highs that they could be measured in weeks, not months. For example, there were 71 trading days in 2017 when the Dow closed at an all-time high. Since the average year has 252 trading days2, over 28% of them closed at an all-time high (71/252 = 28%). That averaged out to be a new all-time high 1.4 trading days every week for the entire year (28% x 5 trading days/week = 1.4).
Furthermore, Nick Magulli runs a popular investing blog, and he recently published the chart below plotting all-time highs as red dots going back to 1915. Notice how they cluster, meaning all-time highs tend to lead to more all-time highs. That’s what has happened so far this year. There were six all-time highs for the S&P 500 and eight for the Dow in January alone.
Simply put, all-time highs happen all the time, and when they do, they have historically led to more all-time highs. But this in no way implies that major milestones like the Dow breaking 40,000 is any more or less significant than any other index level.
The bottom line
My wife threw me a surprise 40th birthday party with close friends and family who flew in to celebrate. The night was incredible and will always be a cherished memory.
We celebrate big birthdays because they represent milestones in life that society has designated important. The same applies to the Dow, and investors should most certainly celebrate the Dow hitting 40,000 if/when it happens because it signifies that the world’s greatest economy has thrived over the past century in ways few civilizations have ever experienced.
However, both my age and the Dow index level are just numbers. I did not wake up on my 40th any smarter, more confident, or wealthier. Aside from my amazing party, it was not much different than any other day that week.
The same goes for the stock market. It’s not like breaking 40,000 will accelerate artificial intelligence or cancer therapies. Again, it’s just a number.
At some point, the Dow 40,000 story will likely be as much of a distant memory as the Dow 30K, Dow 25, Dow 20K, and all others before it. Ironically, the media will be the first to move on because these stories become stale quickly. They will put it up on the shelf until the day when the Dow begins to see 45,000 on the horizon. Then, take a wild guess at what they will do.
The bottom line is that just because pundits apply significance to numbers does not oblige these numbers to be significant. The Dow surpassing 40,000 is no different than a big birthday or a car odometer breaking 100,000 miles. Therefore, it’s best to just celebrate if/when it happens and avoid the temptation to search for a deeper meaning.
1 Bloomberg. As of 1/31/2024
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