All eyes are on Wall Street – or, at least, on Peter Tuchman – as the Dow Jones Industrial Average nears a major milestone.
The Dow closed at 38,239.98 on Monday, meaning it is now less than 2,000 points away from reaching 40,000 points for the first time. The stock market index tracks the performance of 30 of the nation’s major companies, so its performance is closely monitored and widely used as a barometer of the U.S. economy.
Now that he’s flirting with 40,000, here’s what you need to know.
What is the Dow and why do people care about it?
The Dow, which dates back to before 1900, “has historically occupied an important place in investors’ minds because it is seen as a proxy for the overall stock market,” says Kristina Hooper, chief global market strategist at Invesco.
The same goes for the S&P 500, an index that tracks the performance of the country’s 500 largest companies. But Hooper says the Dow is considered to be made up of “blue-chip” stocks, meaning they boast high values, robust histories and consistent profits. Right now, the Dow includes companies like Home Depot, McDonald’s, Amazon, Apple, Disney, Coca-Cola, and American Express.
Because the Dow boasts such a variety of companies — and those companies are household names easily recognized by consumers — investors tend to pay close attention to it, says Elizabeth MacBride, co-author of The Little Book of Robotic Investing: How to Make Money While You Sleep.
Even if a handful of the 30 companies fall on hard times, as long as most are doing well, the American economy is generally doing well, too. Therefore, the Dow is an indicator of both market confidence and sentiment.
Very simply: up is good, down is bad.
A ‘psychological milestone’ such as turning 21
The value of the Dow is the sum of each stock’s price per share divided by a predetermined number called the Dow divisor. At the end of its first day of trading in 1885, the Dow closed at 62.76 (it only had 12 companies back then and was calculated differently, but the gist is clear). Since then, its value has grown rapidly: the Dow surpassed 10,000 in March 1999, 20,000 in January 2017 and 30,000 in November 2020.
For months now the reference index has been close to 40,000, after reaching 35,000 last November. But it’s the overall increase that’s more important than any specific number the Dow leaves in its rearview mirror.
“It’s a major psychological milestone, not unlike when someone turns 21 or when they turn 30,” Hooper says. “It is primarily a psychological factor, but, of course, it symbolizes significant progress for stock prices.”
Reaching 40,000 would be a good sign for the overall economy, but it doesn’t necessarily have a big impact on individuals.
These types of fluctuations are not uncommon; even if the Dow surpasses a milestone, it could quickly fall below it, then repeat the process. MacBride says it’s like you’re walking up a hill with a yo-yo in your hand. The yo-yo will go up and down, but as long as you keep walking, eventually your yo-yo will end up in a higher place.
What does it mean to you that the Dow hit 40,000?
MacBride says the Dow 40K should mostly be a sign that you should stay invested for the long term.
“Investing today is essentially betting that the world economy will continue to grow and you want to be part of that growth,” he says. “The Dow Jones Industrial Average rising and hitting a major milestone is just a reminder that, yes, it is still growing.”
For example, at one point in March 2009, during the Great Recession, the Dow closed below 7,000. Now, less than two decades later, the target is 40,000.
“It’s amazing when you think about how significant that growth has been in just 15 years,” Hopper says. “So if there’s one message I can give to young investors, it would be the importance of not being scared by market declines.”
In general, the Dow hitting a milestone like 40,000 should mean that your well-diversified portfolio is thriving, probably not at the exact rate that the 30 stocks in the index are (unless you own a fund that replicates them), but only in total. . Crucially, it can also be a practical indication that you need to change your strategy.
“If you check your wallet and you are Not doing too well right now, it’s a good sign that you’ve invested too little,” says MacBride.
More from Money:
Because April could see the stock market move even higher
When is the best time to buy stocks?
Can tech stocks continue to lead the market rally?