Dow Under 19,000 Or Dow At 20,000: What Happens First?

The Dow Jones Industrial Average have been on a tear in 2016, advancing 13.74 percent. This came after a 2.23 percent retreat in 2015. With the index hitting an all-time closing high of 19,975, thus coming within touching distance of scaling the psychological barrier of 20,000, the question doing the rounds is whether it would succeed in its pursuit.

Is the index ripe for a correction? Has the bull market seen since 2009 run its course or is there further steam left?

Early Hiccup

The year's rally hasn't been smooth, as the index slumped over 10 percent to hit the year's low of 15,660 in mid-February. Much of the year's gains came via the Trump rally following the November 8 presidential elections.
The lackluster showing in the first-half reflected concerns about economic growth, which slowed to 0.9 percent in the fourth quarter of 2015. Growth remained anemic at 0.8 percent in the first quarter of 2016 only to pick up pace to 1.4 percent in the second quarter and 3.5 percent in the third quarter.

Around the time when the Dow hit the year's low, oil also dipped below the $27-per-barrel level, reflecting demand concerns. However, since then oil has recovered and is trading above the $50-a-barrel mark.

Broad Rally It Has Been

All but two of the Dow components have been in the green in the year-to-date period. Caterpillar Inc. CAT tops the list of gainers among the Dow components, with a 42.95 percent gain in the year-to-date period. Only The Coca-Cola Co KO, with a marginal loss, and Nike Inc NKE, with a double-digit percentage loss, have been decliners in the year-to-date period.

Is the Rally at Risk?

The Dow theory, which suggests that when the Dow Industrials and the Dow Jones Transportation Average move in tandem, points to the preservation of the uptrend.

Many fundamental factors such as the corporate tax cuts that the new administration envisions have the potential to take the markets further higher. RBC Capital Markets expects a 5-7 percentage point boost from corporate tax cuts and see a 10 percent upside for the markets from current levels. Optimistic consumer and business outlook could also have cyclical effect on the economic growth and in turn buoy the markets.

However, if some of the risks materialize, then the Trump rally could peter out. There could be a setback if the stimulus measures the markets are banking on fail to materialize or is delayed beyond the timeline the markets have currently discounted.

Additionally, protectionists policies Trump is envisioning could backfire, creating frictions with trading partners. The economy could also feel the heat of a rising dollar, which has run up on a better domestic economic outlook and prospects of accelerated Fed rate hikes.

20,000 – Not a Door to Prosperity

All the hype around the Dow scaling the 20,000 mark could have been overdone, as market strategists see it merely a psychological barrier and not a door that opens into prosperity. Sam Stovall, chief investment strategist at CFRA, said in a report, "With the Dow flirting with the 20,000 level, we are reminded that millennium and century marks on major stock indices have traditionally acted like ‘rusty doors,' requiring several attempts before finally swinging open."

Thus, the markets could flirt around the level without breaking above it for a while, unless propelled by a compelling catalyst(s).

Benzinga Poll

A Twitter by Benzinga on "what happens first? Dow hitting 20,000 or Dow going back below 19,000" turned in results in favor of the latter case. About 56 percent of respondents feel the blue chip average could reverse below the 19,000 on a correction move as opposed to 44 percent who are confident of the Dow hitting the 20,000 level.

As we ring in the New Year, it remains to be seen if the markets can extend the Trump rally and foray into uncharted territories. The road ahead, though fraught with uncertainties, given fluid expectations concerning the political policy environment, could be less bumpy, as Trump sets out to make America great again.