Some two months ago we told you that you can bet that at some future moment Dow Jones will break the 20,000 mark since, from a historical point of view, the stock market will always go up in the long term despite any corrections, cycles, and economic downturns.
The Dow Jones Industrial Average hit the all-time high of 19,000 in the week after the presidential elections in the U.S. and there is a good chance we will witness it breaking another psychological level of 20,000 before the end of 2016 or in early-2017.
Mid-day trading on January 25, 2017 saw the Dow Jones Industrial Average climbing above the psychological barrier or 20,000 points. It took only 49 days for the Dow Jones to grow from 19,000 to 20,000 points. The previous threshold of 19,000 points was reached after a period of 483 days. The biggest contributor to the impressive DJIA gain is Goldman Sachs Group that added about 30% to the 1,000 point growth of the stock index since November 2016.
This upward development depends and will continue to depend on a few major factors.
The Federal Reserve and Donald Trump
The interest rates are low and the Federal Reserve seems reluctant to raise them significantly in the short term. The FED chairman, Janet Yellen, repeatedly confirms the U.S. central bank will implement normalization measures gradually and the interest rates will remain flat at their present near-zero levels for a while.
Thus, the stock market is gaining momentum since investors are not impressed by a lackluster market for government bonds and securities. Another major factor is related to the pre-election promises by President-elect Donald Trump who pledges to cut tax rates and boost the U.S. economy by implementation of large scale infrastructure projects. Although these projects cannot start before mid-2017, if they start, the market is positive about the prospects of large domestic projects backed by the federal government and developed by local companies.
That is the main driver behind the recent surge of the U.S. stock market, which happened to grow just after the elections after being in downturn for a couple of months . All major U.S. stock indexes reported record highs in the week after the U.S. presidential elections in 2016. Dow Jones, S&P 500, NYSE, NASDAQ, Russel 2000 are all in upturn.
What Stocks and Oil Have In Common
Another, not so obvious driver of Dow’s upward movement concerns the world energy prices. A number of analysts point at the fact that since August 2015, crude oil and the Dow Jones Industrial Average index are developing shoulder to shoulder, following the same trend line. OPEC countries are to meet on 28 November, 2016 in Vienna and if they manage to seal an oil production cuts deal, DJIA main benefit from reduced oil world oil production and witness new gains. Nevertheless, this particular OPEC meeting may not produce any meaningful decisions since major OPEC member Saudi Arabia will not attend the planned meeting with leading non-OPEC oil producers Russian and Azerbaijan the same day.
Low energy prices failed to produce marked economic growth among the leading world economies, nonetheless they stimulate manufacturing in the U.S. and the latest seasonally-adjusted unemployment figures support a positive economic outlook in the short term. This, combined with low interest rates, is in favor of upward development of the Dow Jones Industrial Average and S&P 500 that include major industrial producers in their benchmark index composition.
In the light of the above, the biggest gainers on the New York Stock Exchange during the last couple of weeks are financial companies, large industrial holdings, and defense producers.
Goldman Sachs witnessed their shares add 10% in only two weeks largely thanks to Donald Trump’s promises about relaxed taxation. Other large banks and financial institutions such as American Express and JP Morgan also saw their stocks rising.
Industrial companies like Caterpillar benefited from the promised large infrastructure projects under Trump’s presidency although their shares are gaining throughout the entire 2016, adding impressive 40% during the year.
Defense contractors such as Lockheed Martin and General Dynamics can contribute to Dow Jones growth following Trump’s promise to increase defense spending in the years to come.
The Promise of December
A factor you should also take into account is that historically December is a bullish month for the U.S. stock markets. In the last 100 years, the stock indexes have closed December with positive gains 73% of the time, according to data by Bespoke Investment Group. In the past two decades, the stock market rises nearly 2% on average in the last month of the year and there is no reason 2016 will not witness stock market gains in December.
Psychologically, the markets are ready to accept Dow Jones above the 20,000 mark, relaxing after the end of the U.S. elections and seeing positive signals in indicators that would have been interpreted negatively before the elections. Thus, we can see Dow Jones hitting 20,000 before New Eve or in early-2017.