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In perhaps a financial equivalent of breaking the sound barrier, the venerable Dow Jones Industrial Average (DJIA) forged past the 20,000 mark for the first time Wednesday. After a dazzling post-election run that saw it rise from 18,332.74 at close on November 8, the index came tantalizingly close on January 6, reaching 19,999.63 at 12:44 p.m. EST. It then pulled back, but a series of executive orders intended to expedite infrastructure projects, which the freshly inaugurated Donald Trump signed Tuesday, gave the Dow the final shove it needed.

In July 2012, the Dow stood at 12,500. Back then, gaining 60% in a mere four and a half years seemed highly unlikely, if not impossible. Predictions of Dow 20,000 in the foreseeable future generally were not taken seriously. (See: Dow 20,000 Is No Fantasy.)

Propelled By Trump

The recent drive to 20,000 has been powered by the surprise election of Donald Trump as U.S. president. Investors expected corporate profits to soar in response to his business-friendly agenda, and quickly bid up stock prices. Then, as measured by the broader-based S&P 500 Index (SPX), the post-election Trump rally essentially came to a halt in mid-December after hitting a local high of 19,846.45 on the 13th. Having hastily priced in so many positive expectations, investors began to worry about negative surprises. (See also: Investors Turn Defensive as Trump Takes Helm.)

The Market Craves Certainty

Adherents of this old adage can point to the Dow's 2.5% gain on Monday, November 7 through the next day, Election Day. By that time, the heavy consensus of expert opinion was that Hillary Clinton, the less business-friendly candidate, would win the presidency, probably decisively. Then, by upsetting this certainty, Trump's unexpected win initially triggered panicked overnight selling, causing Dow futures to drop by 867 points. After a 1,172-point reversal, they closed up 305 points in the following session.

Correction Ahead?

Each time the Dow reaches a milestone, a significant correction normally follows. Even between milestones, alternating periods of advances and declines are typical. For example, the Dow fell 10.1% from its 2015 close through February 11, gained 18.7% through July 20, and slid 3.8% through November 4. (See also, The Downside to Dow 20,000.)

Moreover, contrarians​ and skeptics see signs of a market bubble that may produce an especially severe correction when it bursts. Seth Masters, the chief investment officer at AllianceBernstein Holding LP (AB), was greeted with skepticism when he predicted Dow 20,000 a few years back. Today he warns of a bubble in stocks with high dividend yields. (See: Trump’s Promises: Skeptics See Overbought Market, Why U.S. Stock Funds Are on a Roll and Dow 20,000: Beware the Dividend Bubble.)

Rocketing to 25,000?

Bullish analysts counter that valuations actually are reasonable, according to their calculations. Jeremy Siegel, a Wharton finance professor and longtime advocate of equity investing, is among those who brush aside talk of a market bubble. Rather, he sees the Dow reaching 25,000 within a few years. Nonetheless, in an interview with CNBC on Friday, January 6, Siegel acknowledged that "valuations are high, anticipating good things." He also noted that, when the Dow first reached 10,000, it took several trading sessions before it finally closed above that level. (See: Beyond Dow 20,000: More Gains Ahead.)

David Floyd contributed reporting to this article.

 

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