In January of 2017, the Dow Jones Industrial Average crossed the 20,000 milestone. A little over 6 months later, the DJIA crossed 22,000 – fueled by solid corporate earnings, favorable interest rates, and generally positive economic data.
Let’s examine the history of the DJIA, how we got to 22,000, and where we might be going.
The Dow Jones Industrial Average is a stock market index used to assess movements in the US market and its overall strength or weakness. It was created in 1896 by Wall Street Journal editor and co-founder of Dow Jones & Company, Charles Dow.
The Dow tracks the market performance of 30 American large-cap companies. Initially, the Dow had only 12 stocks, including such golden oldies as American Cotton Oil Company, US Leather Company, and Distilling & Cattle Feeding Company. In 1920, the Dow expanded to 20 stocks and then to 30 stocks in 1929. And since 1929, the composition of the Dow’s 30 stocks has changed over 50 times.
Due to its age, the DJIA represents a continuous chart of our nation’s economic growth, along with its ups and downs. And every time the Dow crosses one of those “big-round number” milestones – whether 5,000, 10,000, or 15,000 – it is met with great enthusiasm by some and “gloom and doom” by others.
But those “big-round numbers” have little significance, other than maybe a psychological impact on investors.
Let’s look at some of the Dow’s milestones.
DJIA Milestones Through the Years
November 1972 - the DJIA first closes above 1,000
- Average income per year is $11,800
- Average cost of a new house is $27,750
- Cost of a gallon of gas is 55 cents
January 1987 (15 years later) - the DJIA closes above 2,000
- Average income per year is $24,350
- Average cost of a new house is $92,000
- Cost of a gallon of gas is 89 cents
February 1995 (8 years later) - the DJIA closes above 4,000
November 1995 (Later that year) - the DJIA closes above 5,000
- Average income per year is $35,900
- Average cost of a new house is $113,150
- Cost of a gallon of gas is $1.09
March 1999 (4 years later) - the DJIA doubles and closes above 10,000
- Average income per year is $40,810
- Average cost of a new house is $131,750
- Cost of a gallon of gas is $1.22
May 2013 (14 years later) - the DJIA closes above 15,000
- Average income per year is $51,017
- Average cost of a new house is $289,500
- Cost of a gallon of gas is $3.80
2017 (4 years later) - the DJIA closes above 22,000
All-time Market Highs are Not a Sell Signal
Although the market is reaching new heights, it does not mean you should automatically sell out of equities. If you adopted that strategy over the last few years, you would have missed a lot of gains. The US stock market has set a record high in each year since 2013.
Caution is Always Healthy
New high-water marks aside, US stocks have risen by over 14% a year for the past five years, making US stocks more expensive than their long-term averages. We have not seen normal volatility in the stock market for quite a while, and this will not be the case forever. Nobody can predict how the stock markets will perform; this is why we diversify. Our current portfolio positioning is more defensive than normal, with larger allocations to international and emerging market stocks (which look reasonably priced) and alternatives (providing diversification).
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