Ten thousand points ago on the Dow Jones Industrial Average, there were baseball caps emblazed with 10,000 tossed out at the New York Stock Exchange. There were celebrations and a visit to the trading floor by the New York City mayor.
That was 17 years ago. It was before the dot.com bubble burst, before Sept. 11 and before the Great Recession.
Investors have weathered those risks (and many others) as the most widely quoted stock index in the world flirts with 20,000.
Since 1999 as the Dow Industrial Stock Index has doubled, so has the U.S. economy. In March 1999, when the Dow first hit 10,000, the American economy was $9.5 trillion. Today it’s $18.6 trillion. It only makes sense that the value of the collection of hand picked, publicly traded companies designed to represent the diverse U.S. economy would double too.
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Of course, as the Dow milestones get larger, the return to investors gets smaller. A 1,000-point move from 9,000 to 10,000 was worth 11 percent. The 1,000-point jump from 19,000 to 20,000 is worth about half that. And few investors have positions that mimic the Dow. Long-term shareholders are more likely to invest in funds that follow the much bigger and broader S&P 500 Stock Index. Over the same 17 years, the S&P 500 has had a tamer price rally (about 75 percent).
There are many shortcomings of the Dow index. In a public market of 4,000 stocks, only 30 are included in the Dow. Also, the higher the individual stock price is, the more important that price is to the overall index. This means a less valuable company with a high single-share price (like Goldman Sachs) is considered more important than a company with a lower price-per- share (like General Electric) with a greater total-company value.
The psychology of these big round numbers is important for markets and investors. But it shouldn’t replace economic and business fundamentals.