DOW Surpasses 20K
Bubble Bursting Material
March 2, 2017
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“What?”; “Something with the Stock Market?”; “When DJI hit 20k?” These are some of the most common responses to the question: “What is DOW 20K?” To put it simply, it really does not mean much and is more of a landmark as to the post-election rally. What this landmark could signal is the upcoming market crash. As the common saying goes, “What goes up must come down.”
The DOW’s recent winning streak has made investors quite happy, with common tickers such as Apple (AAPL) up 24 percent since November 8, CSX Transportation (CSX) up 53 percent and Tesla Motors (TSLA) up 39 percent. But it definitely comes with major downsides. In the past, breaking a milestone has had negative consequences. As an example, the DOW broke 10K in March 1999. In a mere two months, it would hit 11K popping the Dotcom bubble and sending the DOW spiraling down to 7.7K in September 2002, resulting in a 34.6 percent loss. As another example, in March 2007 the DOW was at 13K followed by 14K in June of that year. This was followed by the financial crisis of 2008, sending the DOW smashing into the ground with a 53.8 percent loss to close at 6.4K in March 2009.
Nobel Laureate economist Robert Shiller noticed a pattern with the DOW passing milestones in relation to the components price-earnings ratio. Long term projections under pace the ratio at 16.7, whereas the real ratio is 27.28. The over valuation of the companies could signal a tumultuous future for the DOW. This, along with the rising interest rate on the 10 year Treasury Bond (US10Y) and the threat of a rate hike, spells bad news for big companies with debt.
With all the commotion on Wall Street, it is hard to tell what the future holds. It seems to be split down the middle with bears and bulls duking it out on the trading floor.