THE DOW JOINS THE PARTY
John Lynch Chief Investment Strategist, LPL Financial | Jeffrey Buchbinder, CFA Equity Strategist, LPL Financial
The Dow joined the S&P 500 in reaching fresh new highs last week. The record came after a drought lasting nearly eight months. The blue chip index has lagged the S&P 500 Index and Nasdaq Composite this year amid escalating trade tensions, which have weighed on the larger multinational U.S. companies that make up most of the 30-stock Dow Jones Industrial Average (Dow). This week, we’ll discuss the impact of the Dow’s new high and whether stocks have enough support from economic growth and corporate profits to build on recent gains.
NEW HIGHS TEND TO PRECEDE MORE NEW HIGHS
When the Dow reaches a new high, more new highs and above-average performance tend to follow. When there is a lot of time between record highs, the gains tend to be larger and more frequent. In fact, when a record high is the first in more than seven months, the average gain for the Dow in the following six months was 6.3%, with gains occurring 87% of the time (over 15 instances since 1950). Both of those measures are better than the historical performance for the Dow over all six-month periods, as shown in Figure 1. Performance under those circumstances was even better over longer periods (e.g., 12 months), though it was similar over three-month periods. Of course, history doesn’t always repeat, but we think the Dow has more new highs to make over the rest of...