Why has the Dow Jones hit the 20,000 mark and does it really matter?

Donald Trump
US stocks have rallied since the election of Donald Trump Credit: Reuters

What's happening?

The Dow Jones Industrial Average has hit the psychologically important 20,000 mark for the first time, finally breaking the level it has tested for almost a month after US President Donald Trump signed some business-friendly legislation in his first few days on office.

He even marked the achievement with one of his trademark tweets, saying “Great! #Dow20K”.

What is the Dow Jones?  

It's a price-weighted index of 30 of the largest and/or most important publicly traded companies in the US. Invented by Charles Dow in 1896, it acts as a proxy for the wider health of the US economy. The index came within a whisker of 20,000 on January 6, on hopes the then President-elect would introduce some business-boosting measures.

What's so important about the 20,000 level?

In many ways, nothing - it's just a number that relates to performance. However, to humans trading shares, rather than computer algorithms, it represents a significant marker. It's a "resistance level" that can be difficult to break through for human dealers who often trade on fears.

"There are no magic numbers but we like to pretend that there are," said Brian Jacobsen, portfolio strategist at Wells Fargo Asset Management. The occasion he added, was "like watching your odometer cross over 100,000”.

But we've got here. How?

Myriad factors.

1. President Trump

Undoubtedly, the main reason is President Donald Trump. There was a degree of nervousness ahead of the US election but once the bombshell result had been digested, investors decided that Trump would be good for business, and particularly some of the companies that are Dow members.

2. Industry's likely to be stronger

Trump has pledged to strengthen US manufacturing and bring work home, bolstering companies such as Caterpillar, which is up about a third over the past year, and United Technologies, 15pc. Other big winners are 3M and IBM, both about a fifth more valuable.

Mr Trump's tweeted threats about the repercussions for US companies which elected to offshore work caused some consternation, but did have the effect of least encouraging some high-profile names to bring work home or invest in domestic production facilities.

Ford boss Mark Fields said he was investing $700m in a US plant hours after President Trump tweeted criticising GM for making cars in Mexico Credit: Reuters

Companies with big manufacturing operations such as Johnson & Johnson and Procter & Gamble have also soared, as their prospects are closely linked to economic growth.

There's also been the promise to rebuild the US's worn-down infrastructure, which will generate jobs and in turn boost economic growth domestically.

Caterpillar has been among the big risers

This week, Mr Trump signed legislation to build oil pipelines blocked by the previous administration, cut regulation and build his controversial wall on the US-Mexico border, a massive infrastructure project which will deliver a huge lift to construction and building materials businesses.

3. A shot in the arm for pharma businesses

Drug companies also surged immediately after the election, on the belief that Trump would support a free market in healthcare and a potential roll-back of the controversial Obamacare, though the president-elect has since tempered this enthusiasm, saying: "I'm going to bring down drug prices... I don't like what's happened to drug prices." Still, companies in the sector such as United Health and Merck have risen by almost 40pc and 20pc respectively.

4. Banks are in the money

The real stock market darlings are in the banking sector, which has surged on the prospect of lighter regulation and fiscal stimulus measures which will lift interest rates, meaning they are likely to earn more and see more deals.  

Goldman Sachs has been another of the strongest risers

As the Dow neared the 20,000 mark just before Christmas, analysts calculated that investment in Goldman Sachs, up 34pc in the year, was responsible for 419 points of the index's rise since the start of the year. Rival JP Morgan wasn't far behind, with its shares rising a hair less than 30pc over the same period.

Since then, these two investment banks have spearheaded further gains in the index. To give an idea of just how much they have contributed to reaching the milestone, analysts calculate that since November 22, when the Dow first closed above 19,000, Goldman and JP Morgan have been responsible for 20pc of the gain.

JP Morgan has been a big contributor to the Dow's rise Credit: Reuters

Higher interest rates - Fed chair Janet Yellen has already hiked once and signalled two or three more rises to come - have also helped, as banks perform better when rates are higher as they can charge more for loans.  

5. Underlying economic health

The rally, which had stalled immediately after Christmas has gained momentum recently as key economic indicators showed some positive numbers, indicating that aside from a short-term Trump boost, the underlying health of the US economy was improving. A similar picture emerged in manufacturing data from Asia and Europe, further boosting the Dow.

6. Oiling the wheels

Trump's Cabinet appointments also send a loud signal that his administration could be good for big business. Most notable is ExxonMobil boss Rex Tillerson as secretary of state - it's no wonder that Dow constituent Exxon is a major gainer over the year, rising 16pc, though this is far behind Chevron, which is up more than 30pc.

ExxonMobil boss Rex Tillerson is to be secretary of state

7. A cabinet of billionaires

Other big business names will be joining Trump in the White House. Investor and former banker Wilbur Ross - who has an estimated fortune of $2.5bn - is slated to be secretary of commerce. The nomination for army secretary is Vinnie Viola, the founder of trading firm Virtu Financial; he's estimated to be worth $1.8bn. Other leading business figures in Trump's cabinet include a former Goldman COO.  

President plans to make investor Wilbur Ross his Commerce Secretary Credit: AP

There's a lot of bad things going on, though - why is the Dow rising?

Despite terrorist attacks, markets have proven surprisingly resilient, shrugging off fears. It seems that there's a new-found confidence in the air.

Anything else driving this?

Well, the traditional Santa rally that took place before Christmas which set up the Dow to get to the 20,000 mark. As the year ends, shares tend to rise. Whatever the reason for this, it held true at the end of 2016, and set up the Dow for a winning start to 2017.