For the first time on Wednesday, the Dow Jones Industrial Average closed above 20,000 after several weeks of flirting with the benchmark. Time to break out the champagne, right?
Actually … Not so fast.
While shares have been rising in fits and starts for years, the market’s current rally — it’s up more than 9% since Donald Trump’s victory on Nov. 8 — appears to be based on optimism that the president’s big tax cuts and infrastructure spending plans will invigorate U.S. businesses. But while the Dow first hit 15,000 just three years ago, there’s no guarantee we’re on a straight line to Dow 25,000 — much less Dow 40,000. (Rather than obsessing on market moves, individual investors should create a sensible investing strategy based on their goals and tolerance for risk.)
In fact, looking back, the Dow’s biggest milestones have been as likely to serve as ominous warnings, rather than a reason for investors to give themselves a pat on the back. (The benchmark index first registered 1,000, for instance, days after President Richard Nixon’s 1972 re-election — and then took nearly 15 years to get to the 2,000 mark.)
Sure enough, while Wall Street traders have been jumping onto the Trump bandwagon, economists on and off Wall Street have taken a less rosy view. They’ve projected that other Trump plans, such as hefty tariffs on Chinese and Mexican imports and immigration curbs, could slow economic growth. Add in the fact that the Dow’s bull run is already more than seven years old and that large-company stocks are trading at 27.3 times their earnings over the past 10 years — well above a historical average of less than 17 times earnings — and it’s not hard to see how Dow 20,000 might be remembered as a brief interlude of naive market optimism.
Here’s a look at the Dow’s past milestones, along with what MONEY said at the time, and — most important –what happened next.
- When: November 14, 1972
- Price-to-earnings ratio: 18.3
- 10 years later: 1,021
In early 1973 MONEY cheered the Dow’s recent crossing of “the mystical 1,000 barrier.” The magazine cautioned readers about “stock market letters” — an early ’70s term for investment newsletters — even as it noted that the large majority skewed bullish. “Failures are not surprising,” MONEY intoned. “All that’s needed to start an investment advisory service is a typewriter, a duplicating machine, a mailing list and a $150 registration fee.”
The caution proved warranted. Among the newsletters MONEY surveyed in early 1973, roughly four recommended “buy” for every one that signaled “sell.” Yet over the next two years, the stock market lost nearly 40% of its value. From Watergate to “stagflation”– the noxious combination of high unemployment and high inflation — the rest of the 1970s were something of a lost decade for investors. Not until the Reagan boom years did the Dow finally pick up steam again, hitting 2,000 in early 1987 — the year the movie Wall Street came out.
- When: November 21, 1995
- Price-to-earnings ratio: 24.4
- 10 years later: 10,820
The Dow hit 4,000 in February 1995, then zoomed ahead and eclipsed 5,000 by November of the same year. The following month, MONEY quoted a stock analyst named Geoffrey Meredith predicting the market could triple to hit 15,000 by 2010.
Meredith reflected the optimism of the time. The Internet boom was only just kicking into gear, and baby boomers were hitting their prime earning years. (In fact, the article mentioned in passing that iconic boomers, including Cher and “The Donald,” would soon be celebrating their 50th birthdays.)
And as it turned out, Meredith’s prediction was not so far off: The Dow topped 14,000 by the fall of 2007, reversed course in the ensuing financial meltdown, then finally crested 15,000 in 2013. All the same, those intervening ups and downs — including the dot-com bust and the 2008-2009 financial crisis — make 1995’s breezy confidence seem quaint.
- When: March 29, 1999
- Price-to-earnings ratio: 41.4
- 10 years later: 7,522
In just four years, from 1995 to 1999, the Dow doubled to 10,000 from 5,000. In May 1999, MONEY profiled a 35-year-old fund manager who had been dubbed “the Mark McGwire of mutual funds” for his stock-picking home runs. (Back in 1999, that nickname wasn’t ironic.)
To be fair, MONEY also noted that stocks — then trading at values more than twice the historical norms — looked way overvalued. That was unless you believed, as many fund managers did, that the Internet had rewritten the rules of the stock market valuations. It hadn’t: The dot-com bubble would pop roughly a year later, in March 2000.
- When: May 7, 2013
- Price-to-earnings ratio: 23.4
- 10 years later: Only time will tell
It’s been a short three-and-a-half years since the Dow hit its last nice round number — although, of course, not all milestones are created equal. While the market had to climb 50% to go from 10,000 to 15,000 it has needed to rise only 33% to get to 20,000.
As during the 1990s, market watchers have been warning for years that stocks may be more fragile than they look. MONEY has been among the skeptics: Our 2013 investing issue, published at the start of the year, listed “dismal” long-term stock returns as “possibility No. 1.” The prime reason: Despite weak economic growth and an aging population, stocks were already trading at prices well above their historical norms, relative to companies’ underlying profits.
Of course, that prediction turned out to be wrong — or at least it’s been off base so far. After all, economic growth hasn’t ticked up dramatically, and yet stocks are even more expensive than they were three years ago. Investors will just have to wait and see.