Published: Thu, January 26, 2017
Economy | By Melissa Porter

Dow 20000 Means Stocks Are Pricey

The Standard & Poor's 500 index gained 1 point, or 0.1 per cent, to 2,267. The achievement is evidence of how optimistic investors have become about the prospects for the USA economy.

But as the Dow's component companies changed over the years, and the companies split their stocks, simple math no longer sufficed to meaningfully calculate the average's daily point moves. "Happy days are here again", said Ed Yardeni, president of Yardeni Research.

Investors have been flocking to small-company stocks partly because they expect them to benefit more than large multinationals from a pickup in USA economic growth and the lower taxes and deregulatory drive that President Trump is promising. Investors expected corporate profits to soar in response to his business-friendly agenda, and quickly bid up stock prices. Some analysts have cautioned that stocks could also be held back if the administration's policies become bogged down in the political process as the year rolls on.

Another factor pushing the Dow higher is DR Horton's, the largest construction company in the USA, earnings, which came in higher than expected.

The market has been marching steadily higher since bottoming out in March 2009 in the aftermath of the financial crisis.

MSCI's world index, which tracks shares in 46 countries, hit a 19-month high, up 0.8 percent.

Even so, the post-election rally has set an impressive record not only for its historic highs but also for the impressive pace at which it has attained them.

Stocks staged a remarkable rebound in 2016, starting the year with massive sell-offs as investors anxious about China's rocky economy and falling oil prices and then panicked when Britain voted to leave the European Union.

The thing that matters most for valuing stocks is price. In fact, many feared a market crash if Trump upset Hillary Clinton. The rally continued after the election of Donald Trump as USA president last fall. The VIX, a gauge of volatility in the markets, has dropped to the lowest level since July 2014. A Wall Street Journal column in December noted that reaching 20,000 in a timely manner was "a question of 'when, ' not 'if'".

Stocks showed a notable upward move during trading on Wednesday, adding to the gains posted in the previous session.

Financial stocks have been a major factor in the gain - with Goldman Sachs and JPMorgan accounting for around 20 percent of it. Having hastily priced in so many positive expectations, investors began to worry about negative surprises. Already, Trump has scrapped the TPP trade deal and plans to swiftly start renegotiating NAFTA. "In other words, now we basically know what we're getting", he told Business Insider.

Yardeni said the jury is still out on whether the enthusiasm on Wall Street is overdone.

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