Broker Check

Dow Hits 20,000

| February 01, 2017

After weeks of anticipation, the Dow Jones Industrial Average finally broke the 20,000 level in late January 2017. Large round numbers on major market indices, such as the Dow, often cause investors to stop and take notice. However, for most the number can be arbitrary. So what does Dow 20,000 mean?

First, investors are often leery of large round numbers as they are some-times turning points in the market. Large round numbers often create news which attracts new investors and pushes the market up-ward until the key level is reached. But after the key level is achieved the buying fades causing the market to selloff as the anticipatory buying declines.

Second, a large round number can be a time to take stock of long-term market returns.  For example, the Dow reached the key point of 10,000 for the first time in early 1999. That equates to average annual price appreciation of 3.93% over the past 18 years, well below the historical average. So while it is worth taking notice of Dow 20,000, it is also worth taking notice of how long it took for the index to double.

Third, the markets can hit large round numbers on the way down as well. The NYSE announced it would not make a big event out of Dow 20,000 like it did for Dow 10,000 in 1999. This may partially be a result of some traders wearing their Dow 10,000 hats on the floor of the stock exchange when the Dow fell below the 10,000 level in 2001 and again in 2008. This showed that large round numbers really are arbitrary numbers that hold little real meaning.