The Dow at 17,000: Buy or Sell?

The Dow Jones Industrial Average is flirting with another milestone despite concerns from global economists.

Jun 12, 2014 at 1:00PM
Take The Long View

The Dow Jones Industrial Average (DJINDICES:^DJI) was down 65 points at 1 p.m. EDT Thursday. This movement follows yesterday's 102-point decline in the blue-chip index.

The Dow has risen 155% over the past 62 month. And now it's approaching yet another milestone: 17,000 points. Let's take this opportunity to reflect on how far we've come and what the future may hold.

Slow-growth economy, steadily rising Dow
At least some of the Dow's impressive run is a result of just how low the market fell in the panic of the financial crisis and Great Recession. The lows Wall Street hit in 2009 were almost certainly an overreaction to some degree, so it stands to reason that the subsequent bounce would at least in part be driven by the pendulum swinging back the other way. 

That said, the U.S. economy was in serious trouble in 2009 and has since recovered slowly and steadily.

Look at this chart of U.S. GDP, with the Dow Jones Industrial Average offering some context. Both metrics have been on a steady rise from the lower left to the upper right throughout this bull market. That correlation is no coincidence.

US GDP Chart

US GDP data by YCharts.

The unemployment rate today is 6.3% versus 10% in October 2009. Corporate profits have also risen in line with the market's movement higher, from $1.3 trillion in the first quarter of 2009 to nearly $2.2 trillion in the fourth quarter of 2013.

The point is, of course, that the market is being driven higher by an improving foundation in real economic terms. More people are working, the economy is more productive than ever, and businesses are profitable.

Yet there are very valid reasons to be concerned
It's not all good news these days. Corporate profits in the first quarter dropped nearly 10% from the preceding quarter, to $1.96 trillion. National gross domestic product declined at an annual rate of 1% at the same time. 

And now the World Bank has lowered its expectations for global growth. World Bank President Jim Yong Kim said this week that the international financial institution expects the global economy to grow by 2.8% annualized this year, down from the projection in January of 3.2%.

Kim cited the cold U.S. winter, unrest in Eastern Europe, and rebalancing in China for the lowered forecast. For investors, the tough first quarter could signal that this bull market might be stalling out for fundamental economic reasons, even if the second quarter shows a strong bounce. 

So the economy is improving, but it still has weaknesses. That's nothing new. There will always be both positive and negative indicators in a system as complex as the U.S. and global economy. 

US Corporate Profits Chart

US Corporate Profits data by YCharts.

What about value? Is the market overpriced?
According to data from The Wall Street Journal, the Dow currently trades at a trailing 12-month price-to-earnings ratio of 16.48. That compares with 16.38 at the same time last year. In a long-term historical context, this level is very close to the market's average valuation.

The Dow's lowest recorded price-to-earnings ratio was 5.6 times at the bottom of the market crash of 1929. At the height of the dot-com bubble in 1999, the Dow reached a P/E ratio of 44 times. These are the most extreme examples, of course, and the Dow typically trades between 10 and 22 times earnings. 

At 16.48 times today, the market doesn't appear to be markedly overvalued.

So what's an investor to do? With conflicting signals at the macro level, and pundits taking positions on both sides of the "buy or sell" argument?

The best solution is to focus on finding the best-of-the-best companies, and then buying them at attractive valuations for the long term. Investing based on macroeconomics and broad market movements is just too complex, too difficult, and too risky.

If the Dow tears through 17,000 and keeps climbing because of strong underlying economic fundamentals, that's a great thing. It means that more Americans are doing better in their financial lives. 

But if the Dow stops in its tracks and reverses, don't worry. That's your opportunity to buy some of those best-of-the-best companies on the cheap.

The Motley Fool's best-of-the-best stock for 2014
Give us five minutes and we'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks one stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

Jay Jenkins has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers