The 20,000 mark for the Dow Jones industrial average has transfixed the financial media since the stock benchmark crossed 19,000 on Nov. 22, riding a tide of optimism about President-elect Donald Trump’s plans to boost the economy.
While 20,000 is a nice round number that may be psychologically significant for investors, there’s no guarantee that the level will become support for the next leg of the bull market.
“This is a total frenzy,” says David Rosenberg, the head strategist at Gluskin Sheff & Associates Inc., in a December 19 report to investors. “But this is also a classic case of being careful what you wish for.”
He said to remember other times in history when the Dow crossed big milestones:
- “It hit 100 in August 1922; it did not pierce that level permanently for 19 years.
- The index then tests 1,000 in December 1976; it took six years before investors saw that number again.
- And then there are a few of us who surely recall the Dow touching 10,000 to much fanfare on bubblevision back in December 1999; not to be seen again for 11 years.”
The Dow rose 0.2 percent to 19,877 by 12:19 p.m. New York time on Monday. It is up 14 percent since the beginning of the year.
Rosenberg says stocks are getting too expensive compared with the estimated profitability of U.S. companies that are facing higher interest rates and a stronger dollar. A more valuable dollar makes overseas earnings look weaker and makes American goods more expensive to other countries.
“Several real GDP growth forecasts for Q4 are below 2 percent at an annual rate and the impact of the surge in mortgage rates and the crippling effect of the surging greenback risk making Q1 look just as stagnant as it was in the first three months of the year,” he says.
The Federal Reserve last week raised its target interest rate by 0.25 percentage point, echoing a similar hike in December 2015 that was the first increase in nine years. The stock market declined more than 10 percent in the following two months. Real first-quarter gross domestic product grew a meager 1.6 percent from the prior year.
Rosenberg says the S&P 500 is currently priced for 2017 earnings of $142 a share, compared with the median Wall Street estimate of $127.
“Another way of saying this market is three price-to-earnings multiple points too rich for us – fully two standard deviations above the norm for the last decade,” Rosenberg says.
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