The stock market’s attempts to push the Dow Jones industrial average past the 20,000 mark is turning into a Sisyphean ordeal. Once again Thursday, the effort came up short, with the Dow closing at 19,918. Why is this happening, and what’s the significance anyway?
In the myth, the gods punish Sisyphus by having him eternally push a large rock up a hill, only to have it roll back shy of the peak. That’s a lot like the frustration of investors with the Dow, which has been hovering just below the milestone for the past two weeks. Only a month ago, the blue chip index crossed the 19,000 line and quickly charged toward 20,000. But starting Dec. 14, the advance stalled. On Thursday, the Dow finished down 0.12 percent.
“This could tease us for the next week and a half,” through the holidays, never quite crossing the line, said John E. Maloney, chairman of M&R Capital Management. “Or the Dow could top 20K during the trading day and then drift down below it at the close.” Such a frustrating turn happened in 1990 when the average exceeded 3,000 at mid-day, then fell below the mark at market close; it took eight months to break through in April 1991.
In many ways, investors’ fixation on the Dow is matter of nostalgia. The original market gauge, it launched in 1896, as a way to measure the most important U.S. companies’ market performance. But long since then, the 30-stock Dow has been eclipsed by the Standard & Poor’s 500 (inception: 1926), which with 500 members has a much broader range, and others like the Dow Jones Total U.S. Stock Market index, born in 1987, currently with 3,850 members.
As a result, many market savants consider the Dow outmoded and too narrow in its membership to adequately reflect the breadth of the American stock market. Money manager Ken Fisher, head of Fisher Investments, has advised ignoring it, once titling a column he wrote in Forbes magazine: “Never say Dow.”
Nevertheless, it retains a talismanic power in the mind of a lot of investors. A phrase like the “S&P 500 doesn’t roll easily off the tongue like the Dow does,” noted George Young, portfolio manager of the Villere Balanced (VILLX) mutual fund.
Plus, Dow milestones have a psychological effect on the market. In the view of Brad McMillan, chief investment officer at Commonwealth Financial Network, marks like this first act as a ceiling, but once exceeded, function as a floor. “In other words, if we can break through Dow 20K, future gains are likely.”
There are five possible explanations for the Dow’s loitering below the 20,000 level:
Fatigue factor. Even the mightiest race car needs a pit stop. To Sam Stovall, investment strategist at CFRA Research, the hesitation is a matter of the market catching its breath after a strong bull run, a situation he likened to “a rusty door.” Thus far, this year, the Dow is up 14.2 percent. A lot of the surge has come since Election Day: The index is ahead 8.6 percent since then.
Tax selling. The deadline for the tax year is Dec. 31. So a lot of investors are selling losing stocks that they can use to minimize the taxes on their winners. Accountant Elizabeth A. Vuozzo, a director with the Fuoco Group, advises clients this time of year to “mitigate your capital gains tax liability and potentially obtain greater after-tax returns on your investments.” Assuming President-elect Donald Trump gets his tax reduction plan through Congress in 2017, tax selling is a bigger help for investors this year.
Its peculiar stock price-based construction. Most other indexes are asset-weighted, meaning their effect on its direction is measured by market value -- the number of shares outstanding times the stock price. But the Dow is weighted by stock price alone. Fisher has argued that market value gives a more accurate picture of the impact of market players.
This means that Goldman Sachs (GS) is the pre-eminent member of the Dow, due to its $241 share price. Apple (AAPL), whose stock changes hands at $116, is only No. 10 in Dow weighting. But in the S&P 500, Apple, with a market value of $620 billion, ranks No.1. Goldman, whose market value is $100 billion, is just No. 45 in the S&P.
So when financials are in favor in the Dow, Goldman’s gravity is so strong that it pulls the entire roster up. After a big run-up, however, Goldman’s price in recent days has eased downward. That has been a drag on the Dow. “And with only 30 stocks, if a handful move, it has a disproportionate impact on the Dow’s direction,” asset manager Maloney observed.
Low holiday volume. Lots of investors and traders are taking time off for the year-end holidays. Compared to last week, New York Stock Exchange trading volume is off 13 percent, and Nasdaq is down 20 percent. Fewer buyers and sellers translates to less upward pressure on prices.
No catalyst. Late December is not a part of what Wall Street calls “earnings season.” Company reports for 2016’s third quarter petered out in mid-November -- and it was a good quarter, the first positive one for earnings since 2015’s second period. That’s why, in fund manager Young’s estimation, “the market rally is overdone -- it needs earnings to push it over” the 20,000 mark. And fourth quarter earnings won’t start appearing until January.