To buy — or not to buy — after Dow 20,000?

To buy — or not to buy — after Dow 20,000?

By Adam Shell, USA Today

Dow 20,000, a longtime dream of Wall Street bulls that pessimists said was a pipe dream, is now etched into the record books as the biggest milestone ever achieved by the 120-year-old stock index.

The Dow Jones industrial average topped the milestone just four trading days into President Trump's first term, after flirting with the big, round number for more than a month. The Dow's final punch above 20,000 comes amid a whirlwind start to the Trump era, in which the billionaire has reaffirmed his commitment to strengthen the U.S. economy and create more jobs and higher wages for workers. The 30-stock index closed Wednesday at 20,068.51.

So what's an investor to do now?

The latest milestone puts the Dow at another all-time closing high. And you don’t need a Ph.D. in finance to know that new highs in the stock market mean higher share prices, which often translates into anxiety for investors who fear that stock prices may be near, or at, a top.

For the first time in its 120-year history, the Dow Jones Industrial Average hit the 20,000 barrier. Here's a look at other milestones. USA TODAY NETWORK

So what’s next for the Dow?

First off, numbers such as Dow 20,000 are more about investors’ mood than predictive tools, Ari Wald, a technical analyst at Oppenheimer, told USA TODAY during the lengthy run-up to the milestone.

“We haven’t been able to find evidence that round number milestones like Dow 20,000 carry predictive ability, though they may carry psychological significance, similar to how turning 50 in age can be viewed as being more significant than turning 49,” Wald says.

Since history offers lessons, let’s focus first on what could go wrong. After its first close above 10,000 on March 29, 1999, the Dow peaked 10 months later at 11,722.98 on Jan. 14, 2000, suffered through two bear markets in 2000-2002 and 2007-2009, and went more than 11 years before finally breaking out above 10,000 for good in August 2010.

Based on past performance, and with stocks currently pricey based on historical norms, now might not be the best time to jump into the market super-aggressively. A better time to get in was back at the market low in 2009, as the Dow has more than tripled since then.

When the Dow gets this extended, “it will likely cause some selling to enter the market,” says Mark Arbeter, president of Arbeter Investments. “I think there will be a pause at this big, psychological number,” adding he thinks the Dow will clear 20,000 this year by about 10% before a “potential market top.” Most at risk now are bank stocks in the Dow such as Goldman Sachs and JPMorgan Chase that have had “ridiculous runs” and are “benefiting from the Trump card” and higher interest rates, Arbeter says.

To Market-Time or Not to Market-Time?

Michael Farr, president of money management firm Farr, Miller & Washington, sees a market that’s now “expensive” and running on momentum amid hopes for a positive economic outlook under Trump. He’s not advocating a swing-for-the-fences investment plan.

“My crystal ball is no clearer than anyone else’s,” Farr says. “I don’t think anyone can time the markets with any degree of consistency or precision. Therefore, we will remain fully invested but defensive. It can be very dangerous to get too caught up in the market’s euphoria about as-yet unfulfilled campaign promises. However, many studies have shown that it can also be very deleterious to long-term portfolio returns to jump in and out of the market and miss just a few of the best-performing days.”

Bulls, however, advise investors to keep riding the white-hot Dow to more gains — even though they can’t rule out a 5% to 10% drop along the way.

“The melt-up will continue,” says Thorne Perkin, president at Papamarkou Wellner Asset Management. The bull call comes with a caveat, however: "We believe there will be bumps along the road," he adds.

Why the 'Trump Rally' may be overdone

Perkin ticks off reasons for stock investors to stay invested. A sizable pile of investor cash still sitting on the sidelines, he says, will seek out fresh opportunities in the stock market. It “makes no sense,” he adds, for investors to put money into fixed-income assets such as bonds, which are declining in value and don’t provide a big enough yield, or income, advantage over stocks.

Other positives favoring stocks, Perkin says, include a rebound in corporate profits and a belief that U.S. economic growth under a Trump administration will continue at a modest but solid pace of 2.5% or more.

“The penalty for being out of the market is so severe, one needs very high conviction to justify this stance,” Perkin says.

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Pubdate: 
Wednesday, January 25, 2017