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The Irony of Dow 20,000

December 13th, 2016 by

Remember those hats, t-shirts, and other apparel that suggested various targets for the Dow Jones Industrial Average?

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As the Dow Industrials index approaches 20,000 for the first time ever, it’s amusing to take a look at the irony inherent in the stock market exuberance that these targets embody.

Riding the Bandwagon

Back before the financial crisis struck, it was commonplace for traders on the floor of the New York Stock Exchange (NYSE) to sport baseball caps that featured “DOW” followed by a number. The number invariably represented some all-time high that the prominent stock index was expected to hit.

 

This phenomenon had its origins in the prelude to the bursting of the “dot-com” stock bubble in 1999-2000. Back then, people were giddily cheering for “DOW 10,000!” Although there were several hiccups where the index stopped just shy of closing above this milestone before facing resistance, the DJIA eventually soared past the 10,000 marker in March of 1999. Money continued to flow into U.S. equities.

Following the devastation of asset bubble in internet stocks and the real estate market popping in the Aughts, those “DOW 10,000” caps soon became sarcastic “DOW 9,000” or “DOW 8,000” hats. After its dramatic climb and crash, the Dow made only stagnant progress over the rest of the decade.

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Now, the current “Trump rally” is generating the same kind of excitement and overzealous investing in the stock market. The Dow Jones cracked the 19,000 level for the first time ever after the election; as of Wednesday afternoon, it was within spitting distance of 20,000, trading just 55 points below this once unheard of measurement.

Nonetheless, history should be a lesson—and a warning—about how this pattern may play out. Stock market valuations may be at record-highs, but global debt now amounts to a staggering $152 trillion, or the equivalent of 225% of global gross domestic product (GDP).

Considering the successive number of times that U.S. stock indices have notched new record-high closing numbers in the fourth quarter alone, it’s sensible to be cautious about a sharp correction in the near future. Those traders and investors that simply want to “ride the bandwagon” risk jumping aboard at the top of the market followed by a rude awakening. These oft-ironic hats should be a reminder of how quickly a bull market can snap back into an outright collapse when everyone assumes that stocks are a sure winner.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.