This year BYU’s Jamaal Williams broke the school rushing record set by Harvey Unga in 2009. Crowds cheered enthusiastically as this record was broken. The sporting world is filled with many long standing records, and every year excited fans celebrate when one of them is broken. The prominence of sports in American life may well be part of the reason that investors carry into the investing world, statistical misconceptions regarding records.
As we enter 2017 the Dow Jones average (DOW) is at record highs, nearing the 20,000 mark. Some are saying that since it is at a record high, a fall is imminent. It’s almost as if they are thinking in sporting terms where records, once reached, can sometimes take years before they are broken.
This faulty logic comes from failing to understand what a market index really is. Using the word “record” for the index high, may also be creating some of the confusion. In sports, for example, records are always measured within certain limits such as yards, games, seasons, or careers. Regardless of the record, these limits create a theoretical maximum number that limits the potential record.
A stock market index, in a simple definition, merely reflects the price movement of a bucket of stocks. If the companies within the index grow, and their stock prices increase, then the index will go up. Since there is no assigned finite timeline, and no real limit to how large a company can grow or its profits increase, then there would be no upper limit on the price of the index either.
As a young investor I read a book which predicted the DOW would reach 3000 within a decade. That would have required it to nearly triple its then record high, leading to great ridicule from many investors. Nine years later the prediction came true. For some perspective, that would be like predicting DOW 60,000 by 2027.
Market indexes merely reflect economic growth. The indexes recently hit record levels partly because corporate profits are at record levels and secondly, on hopes that a new administration in Washington will be positive for that continued growth. If that turns out to be true, then over the years to come I would expect to see many more records broken. If not, then prices may come down. As in investor, do not think in terms of records, but think rather in terms of future economic potential as you assess whether 2017 and beyond will be good for investors. Then compare that potential to current stock prices. Indexes may go up or down, but it will be based on economic factors, not mere records.
There are only so many plays possible in a 60-minute game or times at bat in a baseball player’s career. But the potential growth of the US and World economies is without foreseeable limits, meaning today’s record DOW 20,000 may one day look like the record high DOW 3000 of 1991. My personal prediction however, is that Jamaal William’s BYU rushing record will last far longer than DOW 20,000.
Hi, I'm Dan. I'm a CFP® Professional.
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