Government & Politics

A 20,000 Dow? Be careful wishing for that

A trader wore a “DOW 18,000” hat on the floor of the New York Stock Exchange in December 2014 as stocks passed the 18,000-point mark into what was then record territory. The Dow now is set to pass 20,000.
A trader wore a “DOW 18,000” hat on the floor of the New York Stock Exchange in December 2014 as stocks passed the 18,000-point mark into what was then record territory. The Dow now is set to pass 20,000. The Associated Press

Uh-oh. Any day now, the Dow Jones industrial average likely will hit the 20,000 mark.

“A lot of people are rooting for it,” and Frank Murtha, co-founder of a research and consulting firm called MarketPsych. “But I’m curious. It may be a big enough milestone that something very weird might happen.”

A few months after the Dow broke 1,000 for the first time in November 1972, stock values tanked and never reached that mark again until late 1980.

In 2007, the industrial index sprinted past three milestones — 12,000, 13,000 and 14,000 — only to dive the following year amid the worst economic downturn since the Great Depression.

Part of New York-based MarketPsych’s business is analyzing how behavioral economics can affect markets and vice versa. Murtha cautions that because stock market milestones can stir our emotions, smart financial decisions don’t always follow.

“People really pay attention to the round numbers,” he said. “I still get a kick when the odometer of my car hits a new set of zeroes. Raise your hand if that isn’t a little fun.”

But those odometer milestones also will encourage some to think about selling the car.

Same with stocks, Murtha said: “You might be thinking, ‘If the Dow hits 20,000 I’ll feel better, and that’s the time I’m getting out.’ 

Or you’ll buy, buy, buy, thinking the equities party will never end. Or you’ll sigh over your own portfolio lagging behind, and sell off in frustration.

Such behavior can trigger a correction, as often happens after the Dow surpasses a magic mark. It falls back — sometimes way back — and investors, for a time, get bummed. Confidence slips.

In March 1999, the Dow hit the once-unthinkable 10,000 mark and kept climbing for eight months until peaking at 11,722.98. Then it sank and 11,722.98 held the record for six years.

This time might be different, said University of Kansas sociologist Chris Crandall, because many corporations expect an easing of regulations and boost in profits in a Donald Trump administration.

“Stock markets tend to go up after GOP presidents are elected,” though they do better in the long run under Democratic administrations, said Crandall, citing The Stock Trader’s Almanac among other sources.

“People almost always want to be hopeful, and stockbrokers and owners are people,” he added. “They succumb to all the usual wishes and biases.”

Many critics say that ordinary investors focus far too much attention on the Dow, as it weighs only 30 companies of the thousands that publicly trade shares. And who really knows what 20,000 means?

The hype is sure to compel some investors to want to fiddle with their portfolios so they reflect similar success, said Mark Zastrow, a financial analyst for Edward Jones Investments in Kansas City.

“That’s absolutely the psyche of the investor,” and probably not a good idea, Zastrow said. If your assets are properly balanced with a diverse mix of stocks and bonds, he said, you shouldn’t blow up your plan.

“Keep your eye on your goals, and make sure your portfolio is aligned to reach them,” he said. “You’ve kind of got to step away from the noise.”

Rick Montgomery: 816-234-4410, @rmontgomery_r

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