Hiltzik: The Dow just broke 50,000. Here's what that means

view original post

Trader Chris Lagana works on the floor of the New York Stock Exchange on Friday as the Dow Jones Industrial Average closed above 50,000 for the first time. (Richard Drew / Associated Press)

Round numbers always enchant humans, especially when they’re big round numbers.

So you’ll probably be reading and hearing a lot about how the Dow Jones Industrial Average crossed the 50,000-point threshold Friday for the first time.

Actually, “threshold” isn’t the right word. The mark’s significance is psychological, if that.

In real terms, nothing got triggered at that moment, which happened at about 2:27 p.m. Eastern time. No rules or regulations changed. In and of itself, it won’t create a jump-up in anyone’s personal net worth.

It’s doubtful that any trading algorithms kicked in, except those that might have been keyed to a sharp reversal of trading sentiment from earlier in the week, when it was pretty sour.

Still, the chances are that attention will be paid. The Dow gained 1,206.95 points or 2.47% Friday, closing at 50,115.67.

If you’re inclined to make a bet, you might put your money on the likelihood that President Trump or his minions will take this to mean the overall economy is firing on all cylinders, thanks to his policies. It doesn’t mean that.

So let’s dig a little deeper into the meaning of this particular round number. We can start by noting that the Dow not only doesn’t rank as a reliable picture of the U.S. economy, it doesn’t rank as a picture of the stock market as a whole. It’s a price-weighted average of only 30 stocks, with higher priced stocks having a bigger influence on the average, while the Standard & Poor’s 500 index tracks, well, 500, and the Nasdaq Composite more than 3,000. (Both those indices moved sharply higher Friday, too.)

Yet I confess I have a soft spot for the Dow. That dates from the 1980s, when it was treated as more of an economic bellwether than now, and I was the New York financial correspondent for The Times.

The Dow had been running up fairly smartly, and I pleaded with the business editor, the revered Paul Steiger, to rescind the rule mandating that I write a story on any day when the average moved 20 points or more. However, I got his agreement that the day it broke 2,000 points for the first time, I would write that story.

And I did! That day was Jan. 8, 1987.

“It’s a milestone because round numbers intrigue everyone,” Newton Zinder, chief market analyst for E.F. Hutton & Co., told me at the time.

William LeFevre, market strategist for the Hartford-based investment firm of Advest, added: “This will bring a lot of little investors into the market, because the publicity associated with it focuses a lot of attention on the Dow.”

But as I observed then, hullabaloo over “milestone” numbers is typically misplaced. The Dow’s first close over 1,000 was greeted with great fanfare on Nov. 14, 1972, when investors and Wall Street professionals read it as a sign that explosive economic growth lay in store for 1973.

Market analysts were nearly unanimous in forecasting that the Dow could rise an additional 150 to 300 points within two years.

Sadly, no. It took nearly 10 years, or until October, 1982, for the Dow to reach even 1,100.

Any optimism the 2,000-point mark inspired also proved to be misplaced. The Dow suffered a major crash of 508 points on Oct. 19, 1987, only nine months later.

Comparing the trajectories of the U.S. economy and the stock market over the four decades since Dow 2,000 is an interesting exercise. In the first quarter of 1987, U.S. gross domestic product was $4.72 trillion, or $13.77 trillion in today’s dollars.

Today it’s $31.1 trillion. So the U.S. economy has grown by 558% in nominal terms, or 125% adjusted for inflation.

In that same period, the Dow Industrial average has grown by 2,400% in real terms, or an inflation-adjusted 758%. The S&P 500 has grown by 2,588% in nominal terms, or an inflation-adjusted 821%.

Dissertations can be written about what these comparative numbers say about, first, the long-term strength of the U.S. economy and, second, whether its majestic growth in wealth is distributed fairly. But they certainly document that corporate and capital valuations have handily outstripped economic growth generally. The bottom line is that few American households feel as if their wealth has grown by 2,400% in the last 39 years, or even 758%.

As for whether it’s possible to read conclusions about the economy in the Dow Industrial figures, it’s hard to discern a clear pattern. For one thing, the 30 components change over time, as the average’s owner, a joint venture between Standard & Poor’s, and the financial services company CME Group.

There’s a bit of gamesmanship involved in these decisions — the most recent change, in November 2024, substituted chipmaker Nvidia for chipmaker Intel. The change kept the average consonant with the evolution of the semiconductor market; Intel shares had lost half their value in 2024, while Nvidia had more than doubled, riding the wave of its dominance over the AI chip market.

Nvidia validated the average-makers’ instincts: Its gain of 7.78% Friday powered much of the average’s advance. Big percentage gainers included Caterpillar (up 7.06%), Goldman Sachs (4.31%), JPMorgan Chase (3.95%) and Walmart (3.34%).

Somewhere in there may lie truths about the semiconductor, banking, retail and manufacturing sectors, but one day’s results probably don’t tell the whole story. Nvidia’s gain came on the heels of a nasty week — the stock had lost 10% of its value since Jan. 29.

History tells us that its unwise to take solid conclusions from short-term action in the Dow or any other index. Friday’s gains could mark a lasting recovery from the market meltdown of recent weeks, or could be what market followers call a “dead-cat bounce,” and the cat is still dead.

For the moment, still, the Dow had a very nice day. That doesn’t mean the euphoria will last.

This story originally appeared in Los Angeles Times.