Wall Street broke the latest milestone on Tuesday when the Dow Jones Industrial Average exceeded 30,000 for the first time
The Dow closed at 30,046.24, up 454.97 points (1.5%). Investors were encouraged by the progress in the development of the coronavirus vaccine and the news that the transfer of power to Joe Biden in the presidential election had finally begun. Traders also welcomed Biden’s choice of the widely respected former Federal Reserve Chairman Janet Yellen as Treasury Secretary.
Milestones are a hot psychological threshold and a promising signal that market rebound is expanding beyond a handful of stocks that have involved Wall Street in a pandemic. However, a Dow of 30,000 means that for most investors’ 401 (k) accounts, the broader market index is also less than the fact that it is a record high.
Let’s see how the Dow has recovered to the latest multiple of 10,000, which has occurred for the first time since January 2017, and what that means for investors.
What exactly is the Dow?
This is an indicator of 30 companies, most of which are good stocks spread across different industries. They include tech stars like Apple and Microsoft, as well as more traditional industrial companies like Boeing and Caterpillar. Other Dow giants include Nike and The Walt Disney Company.
Unlike many other indicators on the market, the most important thing for Dow is the size of the stock price, not the total value of the company. So even if Apple is more than six times more valuable than an insurance company, a 1% move by UnitedHealth Group will have a bigger impact on the Dow than Apple’s same move. This is because UnitedHealth Group’s share price is $ 336.01 compared to Apple’s $ 115.17 due to the low total number of shares.
How big is the Dow 30,000?
This is just an arbitrary number and does not mean that the situation is much better than when the Dow was 29,999. Even more influential is that the Dow has finally regained all its pandemic losses and is once again reaching new heights. It has risen 61.5% since it fell below 18,600 on March 23.
It took more than nine months to break the record set by the Dow in February. Later, a panic about the coronavirus caused a breathtaking sale in the market.
What has become so expensive?
The Dow’s surge to $ 30,000 has brought short-term interest rates back to near zero, the Federal Reserve, which has taken other steps to stabilize financial markets, and Congress, which has provided trillions of dollars in financial assistance for the economy. I got a big boost from. ..
The economy has improved since the first shock of the pandemic. For example, unemployment allowance claims fell from 6.9 million in March to 742,000 last week. The company’s profits didn’t fall as much as they initially feared. And recently, there are increasing reasons why the market is optimistic, as the COVID vaccine may be available by the end of the year.
Among individual companies, Apple did a lot of tedious work early in the Dow’s recovery, after prices rose from nearly $ 275 to over $ 500 by late August. The 4: 1 stock split on August 28 caused Apple’s share price to fall below $ 130, and while total market value continued to rise, its impact on the Dow diminished.
Since then, Honeywell and Caterpillar have provided the Dow with the greatest boost as expectations for an economic recovery have risen.
In the long run, the profits of most Dow companies have risen sharply since they first crossed the 20,000 threshold in early 2017. For example, at American Express, analysts expect earnings per share to recover from the pandemic to $ 6.69 next year. , 2016 recurring profit was $ 6.07.
At the same time, today’s investors are reluctant to pay a high price for every dollar they earn because of the unattractive alternatives. The Treasury yield for the decade on Tuesday was 0.88%, compared to 2.5% in January 2017.
So does this mean my 401K is getting better?
Probably not because the Dow is 30,000. For most 401 (k) accounts, even more important is the performance of the S & P 500. This is because far more equity funds than the Dow directly imitate the S & P 500 or benchmark against its index.
Nearly $ 4.6 trillion of investments track the S & P 500 directly, with an additional $ 6.65 trillion measuring index performance. That total of $ 11.24 trillion is about 360 times the $ 31.5 billion investment in tracking or benchmarking performance against the Dow.
The rally on Tuesday also surpassed the S & P 500 to a record high on November 16.
So why pay attention to the Dow?
One thing that Dow’s final leap to 30,000 shows is that it’s no longer just the tech stocks that are driving the market.
The five big tech companies, Apple, Microsoft, Amazon, Facebook and Google’s parent company alone account for nearly 22% of the S & P 500 by market capitalization. It gives their movements an incredible shake against the S & P 500. Dow does not even include the parent company of Amazon, Facebook or Google.
Big Tech’s dominance in the early stages of market recovery is a major reason why the S & P 500 returned to its pre-pandemic record in August compared to Dow’s November. Recently, with rising expectations that one or two vaccines may arrive soon, equity market profits have begun to expand.
Dow focuses on financial and industrial equities that have recently outperformed technology after a previous pandemic.
The next stop is Dow 40,000, right?
Many strategists along Wall Street are optimistic that stock prices may continue to rise in 2021, primarily due to the outlook for vaccines. However, the market faces many threats in the short term. The most important of these is the exacerbation of the pandemic, which is urging governments around the world to regain varying degrees of restrictions on their businesses.
Bitter partisanship also means that Congress has made little or no progress in providing more financial support to the economy in the meantime. It sets a potentially dark winter stage for both health and economy.
So don’t be surprised if the Dow crosses the 30,000 threshold a few more times.
Explainer: Why Dow exceeded 30,000 for the first time Apple stocked Dow
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