MARKETS AND INVESTING
November 25, 2020
Raymond James CIO Larry Adam puts this new market milestone in perspective.
After recovering from its COVID-driven decline just last week, the Dow Jones Industrial Average has another record to celebrate. On Tuesday, November 24, the index reached a major milestone as it closed above the 30,000 level for the first time on record – its ninth new record high this year.
If the month had ended Tuesday (month-to-date: +13.4%), it would be the best month for the Dow since January 1987 (+13.8%) and the best November since 1928. A wonderful way to celebrate the Thanksgiving holiday!
But what does it mean?
The short answer is that the Dow is now up over 5% year-to-date on a price return basis, and it has rallied more than 60% from its March 23 lows to fully recover its losses and once again hit record highs.
While these thousand-point milestones are always hyped in the news headlines, they should be put into perspective. It’s important to recognize that it has been more than 300 days since the last thousand-point milestone – more than double the average duration for the previous 10 thousand-point increments – and the annualized return of 4.1% is the fifth lowest of any thousand-point milestone on record. Incidentally, this thousand-point increment only represented a 3.4% increase as each milestone going forward gets increasingly smaller.
The slowness of this milestone momentum is unsurprising given the historic levels of volatility experienced since the Dow reached the 29,000 level in mid-January, which was just prior to the COVID-driven drawdown. While the current COVID surge remains a key risk, a multitude of effective vaccine candidates and decreased levels of political uncertainty have overshadowed it. Nevertheless, the economic recovery from the COVID-induced recession has led to vast levels of dispersion beneath the Dow’s surface.
In accordance with our expectation for a K-shaped economic recovery, constituents in the technology and home improvement areas have contributed heavily to this last thousand-point gain. The Dow is up about 4% since the last milestone, and while leaders such as Apple (+49%), Walmart (+31%) and Home Depot (+22%) have lifted the index, constituents in the industrial and energy sectors such as Chevron (-18%) and Boeing (-34%) have reduced its performance.
Is the Dow expensive, and should we adjust portfolios?
Given the recent strong rally in the equity market, we have grown more cautious in the near term as valuations are the most expensive they’ve been since at least 2001. However, despite the potential for near-term volatility, our positive outlook for equities over the longer term is supported by fundamental factors, including:
- A forecasted bounce back in economic activity in 2021
- Expectations for a substantial earnings rebound in 2021
- An accommodative Federal Reserve, and
- Heightened levels of cash still on the sidelines.
With our optimistic long-term outlook, we remind investors that timing the market is a difficult task, and psychological levels such as these shouldn’t be used to make portfolio changes.
All expressions of opinion are those of Investment Strategy and not those of Raymond James & Associates, Inc. and are subject to change. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Past performance is not indicative of future results. No investment strategy can guarantee success. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Investing involves risks including the possible loss of capital. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stocks of companies maintained and reviewed by the editors of the Wall Street Journal. It is not possible to invest directly in an index. Further information regarding these investments is available from your financial advisor. Material is provided for informational purposes only and does not constitute a recommendation.