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What Happens When Dow Reaches 20,000?

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Tuesday, December 13, 2016

Markets have already priced in a quarter-point rate hike tomorrow, and still the Dow Jones Industrial Average forges ahead toward 20,000 — up nearly 40 points by Monday’s close and another 76 points ahead of the opening bell today. ExxonMobil (XOM - Free Report) CEO Rex Tillerson has been nominated by President-elect Trump to run the State Department, stoking the flames of those who question the incoming administration’s unusually close relationship with Russia, and yet the Trump Rally runs on.

There is no hard, fast rule that says the Dow can’t continue higher once hitting this psychologically pleasing 20K number, but then again, trees don’t grow infinitely to the sky. So to the extent that 20K is more than just an arbitrary measure to reach, will it invite a pullback as banks, oil & gas and pharma companies all become more and more expensive?

Perhaps the answer is that we’ll see sector rotation continue — some industries that were sold off initially upon Trump’s surprise election victory five weeks ago may have reached attractive valuations at this point. Maybe we’ll see the bid up in the market lose steam once the realization sets in that it has already priced in much of the growth Trump has promised — more than a month before he takes office.

Once interest rates rise, this puts the idea of cheap money borrowing — such as the $1 trillion Trump wants from Congress for his proposed domestic labor projects — at a little bit of a disadvantage. We’d still be looking at rates that are relatively low on an historic basis, but not so low as they’ve been for the entire Obama administration. Thus, perhaps we’d be hearing from deficit hawks in Congress about putting another trillion on the books.

Then again, perhaps the Dow will simply be looking for its new stratospheric high beyond 20,000. After all, with an Exxon executive directing U.S. powers globally, this would stand to reason that Big Oil may be making a big comeback, well past what’s currently priced into the market. Add to this last month’s OPEC agreement to cut global oil supply — plus the President-elect’s apparent deaf ear to the possibilities of climate change being real — and a new leg up on energy could put the Dow in 2017 on a truly explosive course.

For more information on the possible next U.S. Secretary of State, read this feature story from yesterday: Rex Tillerson for Secy of State: Oil Industry to Gain?

Mark Vickery
Senior Editor

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