Traders work on the floor of the New York Stock Exchange on May 16, 2024.
Spencer Pratt | Getty Images
Breaking major milestones, such as the $40,000 barrier that the Dow Jones Industrial Average crossed this week, makes for great headlines, but market experts aren’t giving the moves much weight.
What really matters is what underpins markets: whether companies are earning sustainable profits, where monetary and fiscal policy is positioned, and what the future holds for the health of the economy, especially the labor market. That’s it.
Fortunately for the market, most of these variables have been looking pretty strong lately, and there are big factors behind the blue-chip average’s recent breakthrough move.
40,000″ is a big milestone, [at the] “At the end of the day, there’s not a lot of difference between $39,999 and $40,000,” said Ryan Detrick, chief market strategist at Carson Group. Think about how many people were talking about recessions and bear markets all last year. Now we’re back to the highs again. ”
In fact, the market remained depressed through 2022, but entered 2023 with nearly everyone on Wall Street convinced that an impending recession would further weigh on stock prices.
But despite volatile corporate earnings and other headwinds, the “Waiting for Godot” economic contraction never happened. At the same time, fiscal aid from Congress helped offset rising interest rates, and a boom in the technology sector driven by artificial intelligence provided a wind beneath the market.
These factors outweighed uncertainty about the direction the Federal Reserve would take with monetary policy as inflation proved surprisingly persistent.
“Investors are just tired of being scared by all the doom and gloom around 2022 and 2023,” said Ed Yardeni, head of market veteran Yardeni Research. “The market has begun to discount the Roaring Twenties scenario driven by productivity and artificial intelligence.”
As investors looked at these threats, the path of least resistance for the market became higher.
The 30-stock Dow Jones Industrial Average is up nearly 6% in 2024 and more than 19% over the past year.
However, the S&P 500 index has significantly lagged the major averages, rising 11% in 2024 and 27% over the past year, while the Nasdaq Composite Index and its hot tech stocks are up 11% and 33%, respectively. There is.
See chart…
Comparison of Dow, S&P 500, and Nasdaq
That comparison took some of the shine off the Dow Jones Industrial Average, which struggled to hold on as Thursday’s trading continued.
In fact, that’s not the only critic of the Dow.
The main reason for the criticism is that they only capture a small part of what is actually happening in the market and tend to introduce new stocks only after a peak has been reached. Due to the soaring price of Magnificent Seven shares, the average price is even lower than the market price.
“People don’t pay as much attention to the Dow, and certainly younger investors don’t,” said Liz Ann Saunders, chief market strategist at Charles Schwab. “I don’t know if they’ve ever thought about the Dow. For young investors, Nasdaq is the agent they think about. But everything else.” [being] Equally round numbers increase psychology. ”
But Saunders believes the factors driving the market up are worth considering. American Association of Individual Investors poll This means more than a third of respondents have a ‘neutral’ view on the stock, and while still largely positive, the bullish outlook has diminished.
“Market participants tend to assume that they are excited about such large year-over-year changes in earnings.Therefore, there may be some risk in setting the bar so high. There is a gender,” Saunders said. “But the current economic situation is a combination of continued disinflation and still decent but not hot economic growth, which is a pretty good recipe.”
Negative sentiment can actually be a boon for the market, especially if it results in an oversold situation.
April’s slump, when the Dow fell 5% as markets became nervous about a potentially hawkish Fed, gave investors comfort in the central bank’s long-term high policy along with solid economic fundamentals. , which helped pave the way for the recent rally. And a strong earnings season.
“What really matters is never where the stock market is; it’s where the market should be priced,” said Paulsen Perspectives, formerly of Wells Fargo and now Substack’s newsletter. Jim Paulsen, an economist and market strategist and author of “If I had this [economic] If we had this number at any point before the Great Recession of 1980 and 2009, we would have heralded Nirvana. Really, the basic story is very good. ”
