As of this writing, the Dow Jones Industrial Average (DJIA) has surpassed the level of 13,000. This is the first time the DJIA has reached 13,000 since the middle of May 2008. But what does this milestone mean exactly? Explicitly, it means that if you had purchased the DJIA around its peak in mid-November 2007, you still need about 6% more growth to reach your high watermark of 14,093. You have been waiting over three years, and your investment has yet to be positive! Some more perspective: the current P/E ratio of a little over 14.3 is based on earnings of about $924 per share. That is just below November 2007’s, which had a P/E of about 17, but only on about $824 earnings per share. To put this in historical terms, the DJIA had a P/E ratio of about 100 on June 2, 2008 at a price of about 12,503. This means that in the middle of 2008, investors were willing to pay about $100 per $1 of earnings for the companies within the DJIA index. Needless to say, that was right before the wheels fell off the proverbial “market wagon,” and the economy fell into the Great Recession. As compared to mid-2008 and late 2007, the DJIA seems like it is relatively strong to the former, and maybe undervalued to the latter.
But where is the DJIA heading? Why is the DJIA priced only at approximately 13,100 and not higher considering how corporate earnings have improved? You can point to one thing: expected growth. The DJIA seems to be gaining some momentum from a slowly upward-moving economy. However, the economy faces multiple headwinds that feel light right now, but could become overpowering in the future. Some of the bigger problems that could detract from growth include, but are not limited to; the possible “fiscal cliff” of Congress not coming together and allowing the automatic spending cuts to remain in place, the lingering European debt problem, high oil prices/threats of war with Iran, and the potential of a Chinese slowdown, among other things. Accordingly, the low interest rate environment is also a very important factor that will affect the value of the DJIA over short periods. So, depending on whether the headwinds materialize, how powerful those headwinds become, or even if they end up being tailwinds, the DJIA could be in for an interesting ride.
Don’t be too surprised to see DJIA 13,000 come and go a few more times.
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