U.S. stocks hits new highs on Tuesday as both the Dow Jones Industrial Average and S&P 500 passed round-number milestones.
Near midday, the Dow was sitting at 16,012 points, up about 50 points on the day. The broader S&P 500 briefly crossed the 1,800 level. Both have never before been that high.
"Today we see why the Dow is such a flawed and misleading stock index," said David Baskin, of Baskin Financial Services in Toronto.
The Dow is a collection of 30 stocks that trade on the NYSE. In fact, 28 of those companies are relatively flat on Monday but the Dow as a whole is higher because of two stocks — Boeing and Goldman Sachs.
Boeing announced it has taken in $100 billion in orders for its new 777 jetliners at the Dubai Airshow. And Goldman Sachs gained two per cent after a report in New York suggested banking regulatory reform will not be as onerous as previously thought.
The Dow is a value-weighted index, which means expensive stocks (such as Boeing and Goldman Sachs) have a disproportionate amount of influence on the total value of what is already a small group of only 30 companies.
"If you look at your own portfolio and you look at the Dow, you're wondering why you're having such mediocre performance," Baskin says. "But people should ignore the Dow."
Broad S&P also higher
The S&P new record, however, is more significant. While not up by much on the day, the S&P has nonetheless crossed the 1,800 level for the first time. The S&P is a group of 500 companies and as such is a truer representation, Baskin and others believe, of the overall market.
"People like round numbers," Baskin says. "The Dow hitting 16,000 is symbolically important and the same goes for the S&P hitting 1,800."
Some are concerned that high levels like that are a sign of a market top, and that it's perhaps time for booming U.S. stock markets to take a breather and contract a little.
But Baskin says the fundamentals support the high valuations. At 1,800 points, the S&P is at roughly 15 to 15.5 times annual earnings for the companies in it. That's well within historical norms, he notes.
"At the end of the day what drives markets is earnings," Baskin says. "Right now earnings are at an all-time high and forecast to go higher. I see no reason to say the stock market is overextended."
"The Fed is still pumping money into the system, which is helping fuel the market," said Planned Financial Services CEO Frank Fantozzi. "There's much more confidence in the market."
The S&P 500 index has risen for six weeks straight and is up 26 per cent so far this year. The market hasn't risen that much in a whole year since 2003. The S&P 500 has closed above major round-number milestones three times this year: 1,500 on Jan. 25, 1,600 on May 3 and 1,700 on Aug. 1.