All eyes are on Wall Street — or, at least, Peter Tuchman — as the Dow Jones Industrial Average approaches a major milestone.
On Monday, the Dow closed at 38,239.98, meaning it’s now under 2,000 points away from notching 40,000 points for the first time. The stock market index tracks the performance of 30 of the nation’s top companies, so its performance is closely watched and widely used as a barometer of the U.S. economy.
Now that it’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 held an important place in investors’ minds because it is viewed as a proxy for the overall stock market,” says Kristina Hooper, chief global market strategist at Invesco.
So is the S&P 500, an index that tracks the performance of the nation’s 500 biggest companies. But Hooper says that the Dow is considered to be composed of “blue-chip” stocks, meaning they boast high values, robust histories and consistent profits. Right now, the Dow includes firms 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 Robo Investing: How to Make Money While You Sleep.
Even if a handful of the 30 companies hit a rough patch, as long as the majority are doing well, the U.S. economy is typically doing well, too. Therefore, the Dow is a gauge of both confidence and market sentiment.
Very simply: Up is good, down is bad.
A ‘psychological milestone’ like turning 21
The value of the Dow is the sum of the price per share for each stock divided by a predetermined number called the Dow divisor. At the end of its first trading day in 1885, the Dow closed at 62.76 (back then it only had 12 companies and was calculated differently, but you get the gist). Since then, its value has grown rapidly: The Dow passed 10,000 in March 1999, 20,000 in January 2017 and 30,000 in November 2020.
For months now, the benchmark index has been flirting with 40,000, having notched 35,000 this past November. But it’s the overall rise that’s more important than any specific number the Dow is leaving in its rearview.
“It’s an important psychological milestone, not dissimilar to when someone turns 21 or when they turn 30,” Hooper says. “It’s first and foremost psychological, but, of course, it does symbolize significant progress for stock prices.”
Hitting 40,000 would be a good sign for the economy at large, but it doesn’t necessarily have a ton of impact on individual people.
These sorts of fluctuations aren’t uncommon; even if the Dow crosses 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, your yo-yo will ultimately end up in a higher place.
What does the Dow hitting 40,000 mean for you?
MacBride says Dow 40K should mostly be a sign that you should stay invested for the long term.
“Investing today is essentially your bet that the world economy is going to continue to grow, and you want to be part of that growth,” she says. “The Dow Jones Industrial Average going up and hitting a milestone is just a reminder that, yeah, it’s still growing.”
For instance, at one point in March 2009, during the Great Recession, the Dow closed under 7,000. Now, less than two decades later, it’s eyeing 40,000.
“That is incredible 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 drops.”
Speaking broadly, the Dow hitting a milestone like 40,000 should mean your own 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 tracks them), but just in aggregate. Crucially, it can also be a practical indication that you need to change your strategy.
“If you check your portfolio and you’re not doing too well right now, it is a good sign you’re invested too narrowly,” MacBride says.
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