Does the Dow hitting 40k matter?

What’s in a number? Especially one like Dow 40,000, which was crossed this week for the first time ever.

To some financial advisors, it holds genuine significance, despite it being more of a psychological marker for investors than a true financial one. For these wealth management professionals, the Dow Jones Industrial Average piercing the 40k level offers insight into investor sentiment which in turn provides clues about consumer confidence, Fed policy and the overall economy.

To other wealth managers, however, Dow 40k holds less meaning, if any. For this cohort, it’s just another number. And the fact that it ends in a zero, or multiple zeroes, is meaningless. And even more so in this case because the Dow is generally viewed on Wall Street as an outdated index due to the fact that it is price-weighted. This means that price changes in the highest-priced stocks have greater impact on the index level than price changes in the lower-priced stocks.      

For example, Dow member Goldman Sachs recently traded at $467 a share, giving it a market capitalization of around $150 billion. That means it has a higher weighting in the 30-stock index than fellow financial, and Dow member, JPMorgan Chase which trades around $204 and sports a market cap of almost $587 billion.

Further devaluing the Dow’s importance in skeptics’ eyes is how its 30 components are selected. The index is maintained by S&P Dow Jones Indices, an entity majority-owned by S&P Global, and selected by a committee which judges the companies on their reputation and market significance.

The S&P 500, on the other hand, is purely market-cap weighted and has no outside, subjective influence.

Still, despite all its faults, Tim Holland, chief investment officer at Orion believes Dow 40K is a market milestone worth celebrating. 

“We remember Richard Grasso of the NYSE tossing out Dow 10,000 hats 25 years ago,” said Holland. “Consider that since then our country has had to overcome 9/11, a housing crisis, a pandemic, and several recessions, among other challenges. The resiliency of our economy and markets is incredible.”

Looking ahead, Holland remains bullish on US equities, believing that inflation and bond yields are biased lower, and corporate earnings are biased higher.

Louis Green, wealth manager at Savvy Advisors, sees the Dow eclipsing 40k as significant because it reflects strength in the earnings of the underlying companies that make up the index, as well as an improvement in the economy, inflation and interest rates. He also feels that it is a “nice even number for investors to benchmark,” even though it is limited to 30 price-weighted stocks.

“I’m cautiously bullish going forward because I believe that the background for stocks will be favorable,” said Green. “However, the valuation of the index at a trailing twelve months price to earnings ratio of 27.9 times versus 22.34 a year ago concerns me a bit. While the forward price to earnings ratio is lower at 19.01 times earnings, we remind our clients to have plenty of liquidity on hand to meet their short-term goals in case of a market decline.”

Ed Stober, senior wealth advisor at Nepsis, meanwhile, finds market highs within an index are always exciting, but more for the pundits who “have an addiction to prediction.”

“We don’t ‘own the market’ so we don’t really focus on ‘the market’,” said Stober. “We focus on finding high quality companies that meet our very specific investment criteria and proprietary conviction factors. What is more important than market highs is understanding what companies you own, why you own them, and having a disciplined strategy as to when you will buy more, sell some or exit the position altogether.”

For his part, Stober is neither bullish nor bearish on the rest of 2024, because that would require him to predict the direction of the markets, which in his view is impossible to do.

“Rather than predict, we embrace volatility as an opportunity to buy more of the companies that meet our investment criterion,” said Stober.

Rick Wedell, CIO of RFG Advisory, believes that Dow 40k is first and foremost a reminder that the economy is doing quite well right now with low unemployment, decent GDP growth, expanding earnings and revenues for most major companies, and moderating inflation.

“The fears of an imminent recession in 2023 never materialized, and instead we’ve been blessed with essentially the strongest economy in the world right now. The Dow hitting new highs - with the S&P 500 and the Nasdaq, too - is a reminder that things look pretty good out there from a macro perspective,” said Wedell.

All that said, he admits there is no “true market significance” to the number, any more than there is when the Dow crosses 40,050 or 39,024 or any other random number. And he adds that in terms of relevance, the Dow has been largely surpassed by the S&P 500 for most market observers. That said, he calls the Dow “the grandfather of them all,” so he thinks the sentimental point still stands.

Finally, Alexander Pron, founder of Crossover Capital, says any short-term volatility, or market celebrations, are simply “noise” preceding more and more accommodative monetary policy.

“With our aging population putting more and more pressure on entitlement spending and the government adding $1 trillion in debt every 100 days, I think the Central Bank money printer will continue to rip in the coming years. Investors will have to own risk assets if they want to retain their purchasing power," said Pron, who is bullish on equities, gold and bitcoin over the long term.