- Some see danger of ‘meltup’, while others say euphoria remains at bay -
No serious investor makes stock-market decisions based on big, round numbers, but the Dow Jones Industrial Average’s move through the 25,000 barrier on Thursday nonetheless is likely to attract more attention to a long-running bull market that until recently was regularly described as the most-despised in history.
“For me, Dow 25,000 is something that your average investor—and the average person who isn’t much of an investor—they’re going to be wondering why they’re still sitting in cash and why they’re not as invested in the market as they should be,” said Scott Wren, senior global equity strategist for Wells Fargo Investment Institute, in a December phone interview.
The Dow crossed 25,000 for the first time in history shortly after the opening bell, a move that comes just 23 trading days after it first closed above 24,000. In recent action, the Dow was up around 146 points, or 0.6%, near 24,070 after notching an all-time high of 25,105.96.
If it closes above 25,000, it will mark the fastest such move between 1,000 point milestones in history (albeit a feat that’s less impressive on a percentage basis as the gauge climbs ever higher).
Moreover, it would cement a positive start to 2018 following a remarkable 2017 rally that saw the blue-chip gauge cross 20,000 in January and proceed from record to record with no major pullbacks. The Dow notched 71 record closes in 2017, topping the previous record of 69 set in 1995.
For 2017, the Dow, a price-weighted average of 30 major stocks traded on the New York Stock Exchange, rose more than 25%, while the broader S&P 500, which is the true benchmark for the U.S. market, rose 19.4%.
Public measuring stick
While the S&P 500 is more relevant, representing around 80% of the investible U.S. equity market, the Dow has long stood as the public measuring stick for the health of the stock market. The Dow, after all, was first calculated in 1896, while the S&P 500 made its debut in present form in 1957.
The hoopla surrounding Dow 25,000 is expected to garner attention, but doesn’t rival the euphoria that surrounded the Dow’s move through 10,000 in the late 1990s—an event that was hyped as the dawning of a new stakeholder economy but was instead part and parcel of a soon-to-pop tech bubble.
The collapse of the tech bubble was followed less than a decade later by the financial crisis of 2007-2009, which saw the Dow plunge from a high of more than 14,000 in October 2009 to a bottom below 6,500 before stocks began a recovery that marked the beginning of the current bull market, which will mark its ninth birthday in March.
For many years, the market’s rise was met with skepticism and hostility, earning it the widely used description as the most-hated bull rally in history. That antipathy has been seen as part of the reason for the market’s durability, however, by investors who often like to cite John Templeton’s maxim that bull markets ”are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria.”
But the market’s 2017 performance convinced many observers that the bull is in a new phase. Some have warned that stocks could be in the midst of or on the cusp of a “melt-up,” a rapid surge higher as investors who fear they’ve missed out on the rally stampede into the market. Such melt-ups are usually followed by sharp selloffs as buyers exhaust themselves.
Well-regarded value investor Jeremy Grantham, in a Wednesday note, said he sees a “possible/probable bubble” forming that could lead to a meltup in the next six months to two years that would likely be followed by a meltdown.
Others see a more subtle turn, with investors who had sat on the sideline beginning to move into the market, but not at a frenzied pace.
Jamie Cox, managing partner for Harris Financial Group with $750 million in assets under management, said the market appears to be in a “transition” stage.
Previously, most market participants were happy with merely positive returns, now many feel their portfolios should be matching the Dow’s pace.
The upshot, Cox said last month, is that investors are transitioning into a phase where “they want to participate more in the market and the decisions they are making are more growth-oriented.”
Cox expected the rally to keep running in 2018. Optimism over the corporate tax cuts signed into law by President Donald Trump last month have been cited as a driver of the stock market in recent weeks. Strong underlying economic growth, both at home and abroad, and solid earnings are also viewed as primary factors behind the rally.
‘Anything but a frenzy’
Wren also sees room for the rally to continue its run, dismissing the notion that the market is on the verge of a euphoric surge. It’s anything but a frenzy,” he said.
At the same time, it is undeniably late in the cycle, Wren said, adding that the question for 2018 isn’t just what tax cuts will do for the market and the economy, but what does the Federal Reserve have in store.
Wren said Wells Fargo has urged clients to rebalance, noting that most are underweight emerging markets and international exposure while remaining overweight U.S. large-cap stocks. He suspects emerging markets, for instance, have room to continue playing catch-up.
“We’re not big fans right here of adding a bunch of risk to your portfolio,” he said. “We want our clients in this thing, but we don’t them really overweight equities, for instance.”