By Andrew Essig, Sr. Portfolio Analyst, Portfolio Strategy and Research, Loring Ward
I well remember when the Dow Jones industrial average reached 10,000 in 1999, as I was working at Dow Jones Indexes at the time. It had been more than 100 years since Charles Dow created his venerable stock “average” and we were approaching a historic milestone. The exuberant 90s were in full swing and the stock market had more than doubled the prior four years.
The financial press was abuzz with articles and reports on Dow 10,000 and the implications of reaching that landmark level. There were even hats created to commemorate the occasion, and New York Mayor Rudy Giuliani wore one on the floor of the NYSE when the milestone was reached.
But the significance of the Dow 10,000 milestone did not extend more than it being a round five-digit number. Five weeks later the Dow hit 11,000, and those who were paranoid that Dow 10,000 meant the end of the rally were regretful when it didn’t peak for another nine months.
One can debate the theoretical merits of a U.S. index that did not add Apple to its calculation until 2015 (it wasn’t a significant part of the U.S. economy before?), but its practical impact and importance as a benchmark for U.S. stocks for “Main Street” is hard to argue. While it consists of only 30 stocks, and utilizes a price weighting methodology borne more out of convenience than academic backing1, it is still the point of reference by local news stations as well as business channels when reviewing the day’s performance of the U.S. stock market. “The Dow dropped 200 points” may be overheard at happy hour, while “The Russell 3000 fell by 13” is never uttered, despite the statements telling the same market story.
People like milestones, and they like round numbers, and the Dow crossing 20,000 appears to check both boxes. But in reality, nothing has changed for long-term investors.
Some investors may fall into the same trap many did in 1999: “The Dow at 20,000 sounds really high, maybe I should sell some stock.” This is a form of what behavioral finance experts call “anchoring,” which is using a reference point to make investment decisions whether the information is relevant or not.
Since the Dow hit 10,000, 2/3 of the time the next 1,000 points was reached in under a year’s time. The nominal level of 20,000 is not all that significant, rather a rational investor should consider only what’s to come. Those who look to time the market may in the long run miss out on the opportunities and growth that the markets can provide.
1S&P Dow Jones Indexes, “Dow Jones Industrial Average – Overview,” from the Dow Jones Averages website