Ten thousand points ago on the Dow Jones industrial average, baseball caps emblazed with "10,000" were being tossed out at the New York Stock Exchange. There were celebrations and a visit to the trading floor by the New York City mayor.
That was 17 years ago. It was before the dot-com bubble burst, before Sept. 11 and before the Great Recession.
Since then, investors have weathered that trio of risks (and many others), and today the most widely quoted stock index in the world is flirting with 20,000.
Since 1999, as the Dow has doubled, so has the U.S. economy. In March 1999, when the Dow first hit 10,000, the American economy was $9.5 trillion. Today, it's $18.6 trillion. It only makes sense that the value of the collection of hand-picked, publicly traded companies designed to represent the diverse U.S. economy would double too.
Of course, as the Dow milestones get larger, the return to investors gets smaller. A thousand-point move from 9,000 to 10,000 was worth 11 percent. The thousand-point jump from 19,000 to 20,000 has been worth about half that. And few investors have positions that mimic the Dow. Long-term shareholders are more likely to invest in funds that follow the much bigger and broader Standard & Poor's 500 index. Over the same 17 years, the S&P 500 has had a tamer price rally (about 75 percent).
There are many shortcomings of the Dow index. In a public market of 4,000 stocks, only 30 are included in the Dow. Also, the higher the individual stock price is, the more important that price is to the overall index. This means a less-valuable company with a higher single stock share price (like Goldman Sachs) is considered more important than a company with a lower price per share (like General Electric) even if it has a larger total company value.
The psychology of these big round numbers is important for markets and investors. But it shouldn't replace economic and business fundamentals.
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