Stocks in the U.S. and Canada hit all-time highs on Wednesday, with the Dow Jones Industrial Average cracking the 20,000 mark for the first time and stocks on the TSX hitting an all-time high above its 2014 record of 15,657. The TSX had settled slightly below that record level as of Wednesday afternoon.
With the Dow Jones industrials above 20,000, it's natural to ask what's going on and what, if anything, investors should do. Here are some answers to common questions that people have about the stock market.
Traders celebrate on the main trading floor of the New York Stock Exchange as the Dow Jones Industrial Average passes the 20,000 mark shortly after the opening of the trading session in New York, U.S., January 25, 2017. (Photo: Reuters/Brendan McDermid)
Q. Can the stock market keep going higher?
A. The Dow has more than tripled from its low point during the recession seven years ago. Some experts have been surprised the market has continued to rise so much in recent months, particularly since corporate profits have been mostly shrinking over the last year and a half, but that doesn't mean the market can't go any higher. The market is now in the second-longest bull run since World War II, following the rally of 1990-2002.
The election of Donald Trump in November has made investors more optimistic about growth in the economy and the profit potential for industries like banking and energy, which are expected to benefit from his drive to roll back regulations, lower taxes and rev up economic growth.
But as financial advisers will tell you, it's best to base your investing decisions on your own needs and financial plans, not on what the market is doing any given moment. Don't load up on stocks if you're getting ready to retire, for example, since they're more vulnerable to short-term swings than bonds are. If you're younger and willing to tolerate the risks that come with owning stocks, they're generally considered a very good long-term investment.
The New York Stock Exchange building in lower Manhattan. (Photo: AFP)
Q. If the market keeps setting record highs, does that mean stocks are getting expensive?
A. By some measures, yes. The long drive up in the market has sent a key barometer of how expensive stocks are above its long-term average.
A stock's price is meant to reflect how much investors expect a company to earn in profits. If those profits grow, you'd expect the stock to rise. Sometimes, though, stock prices rise even if earnings don't, and that's when stocks start to look expensive relative to their historical norms.
One widely used measure of value divides the price of the Standard & Poor's 500 index by the annual earnings at those companies over 10 years, adjusted for inflation. That number is currently 28.7, a bit above where it was 10 years ago but far below where it was prior to the dot-com implosion of 2000-2002. Since World War II, the average ratio has been 19.
Q. I'm embarrassed to ask, but what exactly does the Dow Jones industrial average measure?
A. The Dow Jones industrial average is calculated using the prices of 30 large, or "blue chip,'' stocks from various U.S. industries. It's been around since 1896, when it started out with 12 companies, one of which was General Electric, which is still in the index.
A screen on the NYSE trading floor shows breaking news announcing the Dow hitting the 20,000 mark, Jan. 25, 2017. (Photo: The Associated Press)
Q. How is the Dow Jones industrial average doing relative to the rest of the market?
A. Not bad, but some other parts of the market are doing even better.
Small-company stocks and transportation stocks have had even bigger gains than the Dow has. The Russell 2000 of smaller stocks is up an astounding 38.5 per cent over the last 12 months, versus 26.4 per cent for the Dow.
Investors have been flocking to small-company stocks partly because they expect them to benefit more than large multinationals from a pickup in U.S. economic growth and the lower taxes and deregulatory drive that President Trump is promising. Transportation stocks are up even more. The Dow Jones transportation average, a cousin to the better-known industrial average, has soared 41.2 per cent over the last 12 months.
Other parts of the market are also up, but not as much as the Dow. The Standard & Poor's 500 index has also been setting records, as has the Nasdaq composite, which is heavily weighted with technology and pharmaceutical companies. The S&P 500 is up 22.3 per cent over the last year, and the Nasdaq composite, is up 25 per cent.
Q. When did the Dow first close above 10,000?
A. On March 29, 1999.
Q. So stocks have gone up a lot, what about bonds?
A. Bond prices have gone down a fair bit since the election, which has sent long-term interest rates higher. The day before the election, the yield on the 10-year Treasury note, which is used to set rates on mortgages and other loans, was 1.85 per cent. It now sits at 2.53 per cent.
Investors have been selling bonds because they expect that the infrastructure spending plans of the president-elect could lead to faster economic growth and higher inflation, both of which are bad for bonds.
Q. What about other markets around the world, how are they doing?
A. In general, not as well as the U.S. market. In Europe, Italy's market is up just 5.1 per cent over the last year. France's index has gained about half as much as the Dow has over the past year, while indexes in German and Britain lag the Dow slightly. Japan's market is up 11.4 per cent over the last 12 months, less than half of the Dow's gain.
AP Business Writer Bernard Condon contributed to this story. With a file from The Huffington Post Canada.