Dow 20,000: What’s in a Number?
The following column from Phoebe Venable, CapWealth Advisors President & COO, appeared in The Tennessean on February 10, 2017.
On Jan. 25, the Dow Jones Industrial Average (Dow) pushed above 20,000 and held until trading ended. It was an historic first, a major symbolic and psychological milestone that captured headlines and the attention of market watchers. Practically speaking, however, it’s almost a non-event. There’s very little difference between Dow 19,999 and Dow 20,001 for any individual’s portfolio.
Moreover, though the Dow is famous, partly because it’s been around since 1896, it only represents 30 stocks. Professional market watchers prefer the S&P 500, whose 500-stock index (505, actually) better represents the U.S. stock market and provides a more accurate bellwether of the economy.
So which is it — a major milestone or a non-event? Before answering that, let’s look at how we got here.
Since the election in November, investors have been expressing confidence in our economy by pouring money into stocks, especially shares of banks and other cyclical companies. Investors are optimistic that the Trump administration will ignite economic growth through a combination of infrastructure spending, regulation repeal and tax cuts. President Trump himself acknowledged the Dow’s milestone with a tweet: “Great! #Dow20k.”
Interestingly, the reigning wisdom before Election Day was that a Trump victory would hurt stocks. Many even predicted a crash.
Power, slow and steady
On Jan. 25, 2017, it had been about 18 years since the Dow closed above 10,000 for the first time on March 29, 1999. The growth rate from 10,000 to 20,000 over 18 years is about 4 percent a year. Do you know the “Rule of 72”? To estimate how long it will take your money to double at a given fixed annual interest rate, just divide the interest rate into 72. Or in this case, we know it took 18 years for the Dow index to double, so we divide 72 by 18 to get an interest rate of 4 percent.
Why is that interesting? Because it demonstrates the power of compounding interest, the slow-and-steady engine behind all of our investment portfolios. (Hopefully your average rate is north of 4 percent.)
What was going on when the Dow crossed the symbolic 10,000 mark for the first time? Bill Clinton was president and Donald Trump was divorcing Marla Maples. We were at the height of the dot-com stock bubble. iPhones didn’t exist. The Atlanta Falcons lost Super Bowl XXXIII to the Denver Broncos. Computer technology was changing everything, the internet was taking off and interest rates were falling. U.S. companies were innovating at an incredible pace.
Dips, detours and seeming derailments
By the end of 1999, the country was worried about the Y2K problem. Would there be havoc in computer networks around the world because programmers had represented the four-digit year with only two digits? What would happen when the year changed from 99 to 00?
Computers and networks didn’t shut down and there was no apocalypse at 12:00 a.m. on Jan. 1, 2000. However, the dot-come bubble would burst in 2000 and the Dow would retreat, not to retake the 10,000 mark again until late 2003. By October 2007, it had reached 14,000. Then came the financial crisis, at the bottom of which the Dow index fell below 6,500, eight years after closing above 10,000 for the first time.
Practicing patience and the long view
This isn’t merely interesting, it’s instructional, even essential, to understanding investing. The ups and downs of the stock market teach the wise investor to be patient. As legendary investor Warren Buffett once said, “The stock market is a device for transferring money from the impatient to the patient.” Over time, the stock market has risen. More specifically, there is always opportunity if you know where to look. That is, somewhere a stock is trading at a lower value than it should be for a temporary reason or even apparently no reason — that’s true when the markets are down as well up. And listening to popular opinion or all the background noise can steer you astray.
The most interesting thing about 20,000 isn’t the number itself. 20,000 doesn’t tell us where we’re going. But it does tell a story about where we’ve been and how we got here: through patience and taking a long-term view. For most investors on a long journey, it’s a story we need to hear again and again.
Phoebe Venable, chartered financial analyst, is president and COO of CapWealth Advisors, LLC. Her column on women, families and building wealth appears every other Saturday in The Tennessean.