The Dow Jones Industrial Average (^DJI -0.98%) -- commonly referred to simply as "The Dow" -- recently topped the 30,000 level for the first time ever.
The 40,000 milestone could come sooner than many think. Based on the current level of the index as I write this on Dec. 9, the Dow would need to rise by about 32% to reach 40,000.
Here's why the Dow could hit 40,000 by the end of 2021
This is entirely possible in 2021. Although the incoming Biden administration might raise taxes on corporations and high earners, that isn't likely to happen next year. Several other events could happen next year, however, including another multitrillion-dollar stimulus package, some form of student loan cancellation, falling unemployment, and hopefully several other positive catalysts. These are even more likely if the Democrats win both Georgia Senate seats in the January runoffs.
Image source: Getty Images.
Plus, interest rates are at record lows and the Federal Reserve has indicated that it plans to keep benchmark rates at near-zero levels until well beyond 2021. Economists are projecting GDP growth as high as 6% in 2021, which would be the highest level in more than 35 years.
I haven't even mentioned the potential tailwinds that could propel some of the 30 stocks in the Dow Jones Industrial Average higher. Visa (V 0.05%), McDonald's (MCD -0.42%), and Boeing (BA 1.51%) are among the 10 largest Dow components by index weight, and all three could benefit tremendously from the gradual end of the COVID-19 pandemic. So could Disney (DIS -1.01%), which is still waiting on its theme parks to normalize and for movie theaters and cruise lines to reopen. American Express (AXP -0.84%) and JPMorgan Chase (JPM 0.15%) could also benefit. Apple (AAPL 0.52%) and Verizon (VZ -0.68%) could be big beneficiaries of 5G adoption in 2021. Home Depot (HD -0.31%), one of the top-weighted components, could get a huge tailwind from the strong demand for homebuilding in the United States, especially if mortgage rates stay low.
It's important to consider both sides
Obviously, quite a bit could go wrong. Here are a few of the biggest risk factors standing in the way of the Dow hitting the 40,000 milestone in 2021:
- Vaccine delays: Arguably the biggest risk next year is that it might take longer than expected to vaccinate the U.S. population from the COVID-19 pandemic. This is one of the biggest question marks facing our economy right now. Achieving wide vaccine availability in March will have a very different impact on Americans in 2021 than in September.
- Tax increases: While the most likely timetable for any tax increases would be 2022 or later, Congress could approve tax hikes retroactive to Jan. 1, 2021. An increase in the corporate tax rate to Biden's proposed 28% from the current 21% level would decrease the average public company's earnings by about 15%. A surprise 2021 tax hike could certainly slow down the stock market.
- Interest rates: Interest rates are expected to stay low for the foreseeable future, but this isn't a certainty by any means. Treasury yields or consumer interest rates like those on mortgages could creep higher, acting as negative catalysts for the market.
- Little or no stimulus: Many people expect a significant economic stimulus after the Biden administration takes office. However, that's not guaranteed. If Republicans retain control of the Senate, it could be quite an uphill battle.
Will the Dow actually get to 40,000?
I can say with near certainty that the Dow Jones Industrial Average will reach 40,000. Eventually. Whether it will happen in 2021 or not is another matter.
However, the potential catalysts for such an upward move are certainly there. If all goes well with COVID-19 vaccination distribution, stimulus efforts, and economic reopening, it is more likely than you might think.
