Yesterday was the day: the Dow finally closed above 20,000 for the first time in history. It has been flirting with this level since December 13, 2016, when it first closed less than 100 points away from 20,000. Since then, it hasn’t been able to break through, but it hasn’t sold off either. As we noted on the blog last week, the Dow has actually been in the tightest monthly range in its history recently. Now that it has broken out, what could happen next?
First, let’s take a closer look at big milestone levels (or…let’s break down big milestone levels):
- The Dow first closed above 100 in January 1906, but it traded consistently beneath this level until 1924 and the 1920’s bull market. After the stock market crash of the Great Depression, the Dow last traded beneath 100 on May 26, 1942—some 36 years from the first time it closed above this level.
- The Dow first hit the 1,000 level on an intraday basis on January 18, 1966. It didn’t officially close above this level until November 14, 1972—nearly seven years later. It didn’t really break out above 1,000 for another 10 years in late 1982.
- The Dow first closed above 10,000 in early 1999. After two massive bear markets, the last time it closed beneath the 10,000 level was another 11 years later in summer 2010.
- All three milestones took place with extended valuations and after strong bull markets, which could help explain why longer-term underperformance occurred.
The Dow closed above 19,000 for the first time ever on November 22, 2016, and it only took 42 more days to close above 20,000. This checks in as the second-fastest 1,000 point move ever, with the 24 days needed to go from 10,000 to 11,000 in 1999 the fastest. That move came out to an annualized return of 172%. The longest time between milestones was the move from 1,000 to 2,000, which took over 14 years from late 1972 to early 1987. Of course, a move from 1,000 to 2,000 should take longer, as it is a larger percentage move. Regarding the lowest annualized return, the move from 14,000 to 15,000 took nearly six years, and it came out to an annualized return of 1.2%. The recent 1,000 point move checked in at a healthy annualized return of 36.0%.
Take another look at the table above. What stands out is the move from 18,000 to 19,000 was very slow, as it took nearly two years. Looking at other periods of slow moves, a new 1,000 level led to solid returns soon after. This played out once again.
What has happened after one of the milestone levels cleared? The 4.7% jump the month after 19,000 was one of the best one-month rallies ever, but recent milestones had been weak, as four of the previous five times the Dow was lower a month later. The median return three months later has been slightly weaker than the average return, but longer-term things got back to normal. In fact, the returns a year later have been better than the average yearly return—likely because most of these milestones took place during bull markets.
Per Ryan Detrick, Senior Market Strategist, “These major milestone levels are a nice reminder that the Dow is at a new high. That always gets investors’ attention and likely a closer look at how their portfolios are positioned, but these levels aren’t magical. In the end, valuations, technicals, and fundamentals—not a big round number—are what continue to drive equity prices.”