Insights + Resources

Market Update – Dow Rallies to Record Highs

Dec 18, 2023

Key Takeaways

  • The Dow Jones Industrial Average (INDU) has gone from correction to record highs in only 32 trading days. Broadening participation predicated on falling interest rates and signs of a soft-landing scenario have underpinned the recovery.
  • What happens after a record high? Over the last 100 years, and filtering for record highs occurring at least three months apart, upside momentum has historically continued. The INDU has generated an average 12-month forward return of 11.1% after posting a new record high, with 71% of occurrences producing positive results.
  • And with the INDU already at record highs, all eyes are now on the Dow Jones Transportation Average (TRAN) to confirm the breakout, per Dow Theory.
  • LPL Research views the INDU’s recent record-high rally as another piece of evidence supporting the health and sustainability of the current bull market.

It only took 489 trading days, but the INDU climbed back into record-high territory this week. Broadening participation in the equity market recovery has lifted the index 15% above its recent October low and above the prior January 4, 2022 record high of 36,800.

From a Correction to Record-Highs in 32 Days

Line graph depicting the Dow Jones Industrial Average going from a correction to record highs in the past 32 days as described in the preceding paragraph.

Source: LPL Research, Bloomberg 12/15/23
Disclosures: Past performance is no guarantee of future results.
All indexes are unmanaged and can’t be invested in directly.

While the INDU has become obsolete as a benchmark for portfolio managers due to its price-weighted methodology, its long history and blue-chip components still make it a relevant index to watch. Furthermore, the INDU is a little more balanced with sector weights than the tech-heavy S&P 500, as financials, health care, technology, and industrials each hold around a 15–20% weight within the index.

The INDU is also a key component of Dow Theory — a technical framework dating back to the early 1900s that is generally used to define market trends. Charles Dow, co-founder and editor of The Wall Street Journal, is credited with the original theory.

One of the tenets of Dow Theory is that the averages must confirm each other, simply meaning breakouts and breakdowns in the INDU and TRAN should happen in concert. Conceptually, Charles Dow observed in the late 1800s that raw materials would need to be transported via railroads before economic expansion could begin. Subsequently, robust rail activity would typically portend favorable economic conditions for industrial companies.

With the INDU already at record highs, all eyes are now on the TRAN to check the box for a Dow Theory buy signal (the averages must confirm each other).

Will Transports Confirm the Rally?

Line graph depicting the TRAN Index moving toward a record high as described in the preceding paragraph. 

Source: LPL Research, Bloomberg 12/15/23
Disclosures: Past performance is no guarantee of future results.
All indexes are unmanaged and can’t be invested in directly.

What Happens After a Record High?

While record highs are great, the next question, of course, is what happens next, especially for those investors who may have missed the rally. Using history as a guide, we found that over the last 100 years, upside momentum continued after the INDU registered a meaningful record high, defined by record highs occurring at least three months apart. As illustrated in the table below, the INDU has generated an average 12-month forward return of 11.1% after posting a new record high, with 71% of occurrences yielding positive results.

Line graph depicting Dow Jones Industrial Average post record high performance from 1923 to Dec. 2023 as described in preceding paragraph.

Summary

While the INDU’s price-weighting methodology limits its use as a portfolio benchmark, the index’s long history and blue-chip components still make it a relevant benchmark to watch. LPL Research views the INDU’s recent record-high rally as another piece of evidence supporting the health and sustainability of the current bull market. A breakout on the TRAN index would further support the bull case and check the box for a Dow Theory buy signal. Finally, history suggests that record highs are typically followed by continued upward momentum. Or as veteran technician Stan Weinstein said, “Whenever a breakout occurs with a stock moving into virgin territory (it’s never traded there before), this is the most bullish situation you can buy. Think about it. There isn’t one person who is long and has a loss.”

IMPORTANT DISCLOSURES
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.

Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

Asset Class Disclosures –

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

Bonds are subject to market and interest rate risk if sold prior to maturity.

Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.

Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Precious metal investing involves greater fluctuation and potential for losses.

The fast price swings of commodities will result in significant volatility in an investor's holdings.

Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.

Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value

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