TheCable

After six weeks of flirting with the 20,000 benchmark and almost 18 years after crossing 10,000, the Dow Jones Industrial average finally broke above 20,000 on Wednesday.

Donald Trump took the credit and his team were quick to claim it’s the “Trump effect”, ignoring the 148% gain in the index during Barack Obamas’ presidential term.

The rotation from bonds to equities and from defensive stocks to cyclicals resumed after a one month break, suggesting that optimism about reflation and growth are currently outweighing fears of protectionism.

Round numbers are psychological and very exciting for many investors, especially for those left behind who didn’t participate in the most recent rally. Is it time to join the party?

I believe that when an index crosses a new benchmark, it plays as a reminder that stocks go up overtime and if you’re a long-term investor you should be well diversified and let the dollar cost averaging do the magic for you. However, if you’re joining the rally just because of the high-adrenaline then you should maybe think twice.

Although the Dow Jones Industrial Average has a lot of history, it doesn’t really represent the whole market. Not just because the entire index is made up of only 30 companies but the weights of the companies aren’t fairly represented. For example, Goldman Sachs, IBM, 3M, Boeing, and United Health represent one third of the index while Apple which has a larger market cap than the 5 companies combined only represent 4% of the index. If you need a better representation of the market, S&P 500 is the index to watch.

The outlook for the U.S. economy might be brighter with Trump’s pro-growth policies, as it seems he’s carrying through with his campaign promises, but so far, it’s not very clear how significant the impact will be on GDP.

The momentum trade may resume on the short run, however, what concerns me at the moment is the overstretched valuations at a time when fixed income markets started providing some decent yields, and the current earning season is not strong enough to justify these levels. If retail traders started getting excited about jumping in, this should probably be a warning sign that a correction is due soon.