The Dow Jones Industrial Average (Dow) rose to a record high, closing up 0.8% at 20,069 on Wednesday, Jan. 25. Other broad U.S. stock market indexes (such as the S&P 500 and the Nasdaq) also closed at a record high. Strong company earnings combined with continued investor optimism about the Trump administration's policies to accelerate economic growth pushed the Dow over 20,000 for the first time.
We think the rise in the Dow above the 20,000 milestone is good news, but it isn't a ceiling or a floor – it'll just get a lot of attention. For example, the Dow first closed above 10,000 in 1999 but bounced above and below that level more than 60 times through 2010. Short-term market moves can't be predicted by crossing a round (or any other) number.
A new milestone for the Dow provides some perspective and is a good reminder that stocks tend to rise over time because the economy grows and earnings increase. Those fundamentals provide the support for higher stock prices, and both appear to be improving – and could get further help from pro-growth policies. Over the 18 years since the Dow first reached 10,000, despite two burst bubbles, two recessions and a financial crisis, the Dow's total return was about 6.5% annually. That's in line with our expectations for returns on U.S. equities over time.
Better economic growth and rising earnings, combined with improving investor sentiment, have pushed U.S. stocks to new record highs, and international stocks are also higher. Pro-growth policies should result in an improving economic outlook later this year and into 2018. As a result, we think global stocks will stay on a rising trend, but there's likely to be more volatility ahead, too.
Execution isn't likely to match investors' elevated expectations, and not all the policy changes will be favorable. In addition, interest rates have risen, pushing bond prices down. That means better-diversified portfolios aren't up as much as U.S. stocks, but remember, they also tend to be less volatile. Stick to your strategy by keeping your investments aligned with the mix of stocks and bonds personalized for your situation, comfort with volatility and long-term goals.