Dow 21,000 – What’s Next?

The U.S. Stock market has, let’s be honest here, soared since the election from just under 18,000 on November 8th, 2016 to over 21,000 on March 1st.  That’s a move of 16% in a very short period.

Dow Jones Industrial Average 1 year Chart

Dow Jones Industrial Average 1 year Chart

 

 

 

 

Naturally, when we see a protracted move that is counter to what most people expected, you get some well-deserved head scratching and pontificating that the market should go down a lot because it went up so fast.

Not so fast.  Just because it did the opposite of what many “experts” and talking heads thought, does not mean that the stock market will go down to whatever level they think it should be.  I deal in the world of brutal honesty.  Some of my friends and family will tell you that I am too frank with them but that characteristic has served me well in managing money.

Here are the facts:

Fact 1: If I use the average target price for each stock in the Dow Jones Industrial Average (there may be 10, 20, 30 or more firms that have a price target for each company) and multiply it by the weighting for each stock, I get a target price for the Dow Jones Industrial Average of 21,673.  That’s up 7% or so from here.  Not bad but not great.

Fact 2: The stock market in the US drops 5% or more usually 2 to 3 times each year.  Before March 21, we had not had a 1% drop in the market since October 11, 2016 – 109 trading days or over 5 months.

Fact 3: There is usually something worthwhile to buy out there.  Case in point.  While the U.S. stock market as measured by the Dow Jones Industrial Average is up from 12,354 10 years ago, to today at 20,668 or 67% (not including dividends) the Europe Far East & Australasia index (basically the rest of the developed world) has declined from 2,100 to 1,800 or -14%.

EAFE Index (Europe, Australasia, Far East) - The rest of the world outside the US

EAFE Index (Europe, Australasia, Far East) – The rest of the world outside the US

So, what is an investor to do?  Experience investors will likely hold off on committing much more money to the US until prices decline more or earnings catch up and probably accumulate more overseas stocks. After all, the expectations are very low for most international companies, prices are reasonable if not cheap and because their currency is cheaper and the dollar is strong, their products are cheaper in the US and the profits they bring back to their home country are higher because of the currency conversion.

A bit of advice for new and old investors – if the financial news drives you nuts sometimes…turn it off.  Crisis and bad news sell advertising time.  The more they can conflate a normal correction, the more likely you are to watch thus helping the networks make more money.  Get outside and enjoy the world- it’s way more interesting than the stock market!

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All views/opinions expressed in this article are solely those of the author and do not reflect the views/opinions held by Advisory Services Network LLC or Calton & Associates, Inc.

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