The Dow Jones Industrials (DJINDICES:^DJI) finally broke its four-month slump yesterday, setting a new record close to eclipse the previous mark set on the last day of 2013. That Dec. 31 record marked the 52nd time during 2013 that the Dow had closed at an unprecedented high, and yesterday's accomplishment raises the question of how many more records investors should expect this year. As of 12:30 p.m. EDT, the Dow was on track to set a second record for the year, trading up by six points.
New records by the Dow Jones, S&P 500 (SNPINDEX:^GSPC), Nasdaq Composite (NASDAQINDEX:^IXIC), or other often-followed indexes have a psychological impact on how investors think about the market. That makes tracking records more than just an exercise in trivia. Let's look back at history to see how frequently the Dow hits records, and more importantly, how new record highs should affect the way you invest.
How often does the Dow set new record highs?
Yesterday's close marked the 884th time since the Great Depression that the Dow Jones Industrials have set a new record high, according to figures compiled by market followers on Wikipedia. As you'd expect, those records tend to come in clumps, with bull markets often allowing the blue-chip index to top previous highs, but bear markets pushing the Dow downward and forcing it to spend years recovering to its former high-water mark. For instance, after the Crash of 1929, it took the Dow 25 years to hit its next record. Similarly, the Dow went through rough patches from 1967 to 1971 and from 1974 to 1981. More recently, slumps in 2001 to 2005 and 2008 to 2012 forced investors to remain patient after huge declines.
Last year's string of 52 record closes for the Dow Jones Industrials was the biggest number in any single year since 1995, when the average set 69 records, the most of any year in the Dow's history. The stock market had particularly strong years in 1995 and 2013, with the Dow climbing 33% in 1995 and 26.5% last year. During the long bull-market stretches of the 1990s and mid-2000s, the Dow typically set 20 to 40 new records per year, reflecting the more modest total returns that the average gave investors during those years.
Will yesterday's new record inspire more?
Last year, investors seemed to build momentum based on the stock market's records. For instance, when the Dow set its first record of 2013 on March 5, it followed that up with seven more consecutive daily closing highs. During the month of November alone, as the bull market continued to build up steam, the index set records on 12 separate days.
Based on that track record, it's not unreasonable for Dow investors to expect further records in the near future. But the longer-term concern for followers of the Dow Jones Industrials should be that the average hasn't had a major correction for a long time, and the longer it goes without a significant drop, the more likely it is that when a drop does come, it could be severe -- severe enough to leave the Dow with a lot of ground to make up before it can start setting new records again. Whenever that happens -- and it will happen eventually -- it will crush the Dow's chances to match the strong performance of 2013.
For long-term investors, tracking Dow records isn't worth obsessing over. But understanding market psychology is an important part of being a successful investor, and avoiding getting caught up in Dow record hysteria is a key component of staying on track with your long-term investment strategy.
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