Dow Jones Industrial Average – The Journey to 20,000

Tom Arnold, University of RichmondDow Jones Industrial Average – The Journey to 20,000By Tom Arnold, University of Richmond (VA) 

The Dow Jones Industrial Average (DJIA) reaching 20,000 for the first time appears to be drawing the same kind of attention as it did when the DJIA reached 10,000 a number of years ago. The substantive event is that the index is increasing, which many imply as a sign of better future prospects for the economy and business in general. The market appears to be reacting positively to President Trump’s executive orders. The perception of the market is that President Trump will cut regulation and implement a number of infrastructure projects that will be very positive for the economy. However, the rhetoric regarding trade may eventually turn the market in the other direction. It is currently not known how trade policy will evolve under President Trump and if it will ultimately benefit of the U.S. economy. As more policies emerge and as President Trump builds his cabinet, a new assessment of the future of the economy will be made by the market.

As to crossing the 20,000 threshold, this is more of a “symbolic” achievement for the market.  The 21,000 threshold is a more impressive achievement, but should it happen, even within the next few days, it will not receive the same attention. Ultimately, the focus should be on the investment return that is being generated by the market and not on the level of a given market index. If President Trump’s policies continue to be positively received by the market, it is the return generated by the market that benefits the investor and not the observation that the DJIA has crossed 20,000.

My interpretation of the market increase since the election is a combination of two factors. One factor is a collective opinion on the future direction of the economy. The other factor is the “certainty” that has been created since the election. After the election, the market knew who was to become the President, the Federal Reserve actually moved rates instead of considering moving rates, and President Trump started a number of initiatives that had only been campaign promises prior to his inauguration. The market does render an opinion on the economy, but that can only occur when the information assessed is “certain” rather than speculative. The latter creates oscillations in the market and the former creates a direction. So far, the direction appears to be positive.

 

About the Author: Tom Arnold is a professor of finance at the Robins School of Business at the University of Richmond. He received his Ph.D. from the Terry College of Business at the University of Georgia and is a chartered financial analyst. His research appears in the Journal of Finance, Journal of Business, the Financial Analysts Journal, the Journal of Applied Corporate Finance and the Journal of Financial Education. He has been widely quoted in the media for his expertise, and his research has been mentioned in the Wall Street Journal, the New York Times and the Economist.  

 

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