You may have heard news headlines stating that the Dow is in new record territory having hit the 22,000 level. You may also be wondering what does this market milestone mean, or more specifically, what does it mean for your personal investments and retirement portfolio.
The Dow Jones Industrial Average (DJIA) has been shattering records. Just six months after crossing the 20,000 mark, it has now hit a new record level of 22,000. This may not mean much to your personal portfolio, but it is symbolic of the extraordinary bull market run we have been on since 2009.
So here is some background on the Dow and some of the reasons it is soaring to new record highs:
What is the Dow Jones Industrial Average anyway?
The Dow is the oldest and most widely followed U.S. stock market index. It is comprised of 30 large public companies and is meant to represent a broad cross section of the market consisting of blue chip companies such as Apple, Boeing, Caterpillar, Exxon Mobil, Home Depot, Johnson & Johnson, Verizon, and Disney.
How is it calculated?
The DJIA is a “price-weighted” index, which means that it is calculated by adding up the stock prices of the 30 stocks and then dividing them by a magic number called the “Dow Divisor” which is adjusted to account for things such as stock splits, dividends, and spin-offs which have an effect on the share price of the underlying components.
So which specific companies have driven the Dow to 22,000?
On March 1st the Dow hit the 21,000 level. Since that time, shares of Boeing are up 54%, adding 370 points to the index. McDonald’s and UnitedHealth Group were close behind, adding 189 and 172 points to the Dow respectively. One of the worse laggards in the Dow over this time period was IBM. It was down 37.5% and cost the index 257 points. So that gives you an idea how the underlying stock performance of the Dow’s members can drive performance, but what about the bigger stock market picture?
Why is the Dow smashing records?
The market has been on a roll since the election thanks to the promise of regulatory and tax reform. If these business-friendly initiatives pass, investors believe corporate earnings stand to benefit. But what are the other factors driving up the stock market?
- Strong economy – low unemployment, slow but steady economic growth, and a stronger global economy.
- Low interest rates – even though the Fed has increased rates 3 times since December, rates are still near historical lows giving investors few options other than stocks to invest in.
- Strong corporate earnings – companies have been earning higher profits and expectations for the future remain positive.
- Weak dollar – many of the Dow components have large international operations and do a lot of business abroad. The US dollar has fallen 10% this year relative to other currencies, meaning that foreign profits are worth more in dollar terms and US-produced goods are more price competitive overseas.
What does Dow 22,000 mean to me?
This market milestone in itself is meaningless. There is nothing significant about the 22,000 level other than it represents the fact that the stock market has been going up. And for clients like yourself who have exposure to the stock market in your retirement accounts, that’s a good thing!