5 things you need to know about Dow 20,000

The Dow’s ongoing flirtation with the 20,000 market milestone is the talk of Wall Street.

The 120-year-old Dow Jones industrial average, arguably the world’s best-known stock barometer, is trading near a level never seen before. And we’re not talking Dow 10,000 like back in 1999 but almost Dow 20,000.

On Thursday, after coming within 14 points of 20,000, the Dow closed down 32.66 points, or 0.16%, at 19,941.96, leaving it 58 points shy of its biggest milestone ever. Thursday’s flirtation with 20,000 comes a day after the 30-stock blue-chip stock index climbed within 13 points of the closely watched level — as the waiting game for the history-making event on Wall Street continues.

Sure, the chase for Dow 20,000 is getting a lot of attention, but how big a deal is it?

USA TODAY got answers to key questions about the Dow’s run at history from Mike Baele, managing director at the Private Client Reserve at U.S. Bank in Portland, Oregon.

WHY, WITH THE DOW SO CLOSE TO 20,000, CAN’T IT GET OVER THE HUMP?

It’s important to keep in mind where we have come from. On Election Day, the Dow closed at 18,333. Wednesday’s high of 19,987, a value close to 20,000, is a more than a 1,650-point move, representing 9% in price appreciation in just six weeks. This has been one of, if not the most, impressive post-election rallies of all time. It may be that the 20,000 level is a reminder of how far and how fast we have come. Market valuations are looking stretched in the short-run.

IS DOW 20,000 A BIG DEAL?

Big milestone numbers like Dow 20,000 are psychologically important. These levels generate headlines, acting like an advertisement for investors. This can serve as a double-edged sword, as it offers confirmation to investors who have enjoyed the run, but also a warning that levels may be getting stretched. Historically, there seems to have been increased volatility around the big Dow milestones, both in the run-up and once the milestone is breached.

DOES A NEW MILESTONE MARK A NEW STAGE OF THE BULL RUN WE’VE SEEN?

The reality is that 20,000 is just another number. However, the reasons for the move are many. The drivers include an improvement in earnings in the third quarter and hope for even better results in the coming quarters; better-than-expected economic numbers, which includes solid employment, housing, inflation, and consumer and business confidence numbers, which suggest improvement in spending metrics going forward; and prospects of increased fiscal stimulus under a Donald Trump administration (via) lower corporate tax rates, infrastructure spending and a reduction in regulatory constraints.

Each of these positive factors, at this point, represent hope for improvement in economic results and corporate earnings. If these hopes are realized, then the bull market will continue.

WILL DOW 20,000 IMPROVE THE MOOD OF INVESTORS? 

A headline grabbing milestone like Dow 20,000 is likely to be viewed positively by most investors. Market gains can lead to a wealth effect, where investors feel better about their situation and are more comfortable with spending decisions. For example, a rise in stocks in the fourth quarter has often been a leading indicator for improved holiday spending.

IS DOW 20,000 A REASON TO BUY?

Surely there will be some investors who have missed out on the recent rally and will be lured back in. Perhaps, equally important, is the potential impact of the damage that has occurred in the bond market. Over the past several years, many tens of billions of dollars have been added to fixed-income investments, at the expense of stocks. With the recent rise in bond yields (as prices fall), many of these bond investments are now under water. We could see additional funds flow into equities as investors review their fourth-quarter statements and decide to rotate out of bonds and back into stocks.