Should Investors Beware Dow 20,000?

In all relationships, new events are a cause for celebration. Think of anniversaries, births and graduations.

But when it comes to investing, certain banner events are ultimately fraught with ambivalence and even peril, which never bodes well for market activity.

Take the oh-so-near touchstone of Dow 20,000, which keeps dominating the financial news and which at this writing seems just out of reach.

Late last week it looked like that psychological barrier would be breached, but stocks retreated from a level that was about one point away from the fabled threshold. Bank stocks, of course, have had a nice run. So have once-stodgy manufacturing and industrial firms (after all, this is the Dow Jones Industrial Average).

The incoming Trump era has stoked those equities, as investors have looked at the potential for infrastructure spending, and regulatory rollbacks, to bring renewed torque to earnings.

Investors also are also known to climb what is known as a “wall of worry,” where folks who have missed out on the rally are then predisposed to jumping on stocks in fear that new gains are to come and they will miss out yet again. This has an amplifying effect as stocks climb higher and then climb because they are climbing.

The problem now lies with valuation. The price-to-earnings ratio sits at 22 times, roughly, with a dividend yield that becomes somewhat less attractive in an era of rising rates (i.e., investors who like yield can seek it elsewhere as returns on that metric can increase amid interest rate boosts). The earnings season looms large, as it always does, at the end of the month and beyond. And here we may see some commentary, perhaps not sanguine, about China and other geographies where growth may be slowing.

Commentary to that effect may broaden worries about the consumer engine that pulls so much weight (that would be China), and with a strong dollar, there could also be concern that exports from our own shores might slow. Take the headline number with a grain of salt and perhaps step back from the party.


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