The Dow Jones Industrial Average (DJIA) traded above 30,000 points on 24th November, an increase of 1.42% compared to the previous day. This is a significant milestone for the Dow, which measures the performance of 30 large companies listed on various stock exchanges in the US. The record high marks significant growth in the US stock market, yet is broadly unrepresentative of the US’s current economic situation. Unprecedented economic challenges stemming from COVID-19 are being compounded by a divided political environment, meaning that the economic outlook remains uncertain.
The Dow increased past the 30,000 points mark largely based on the news of effective vaccines, which may signal a solution to the ongoing COVID-19 pandemic, and that US election uncertainty beginning to resolve itself. In the weeks before 24th November, three pharmaceutical companies announced promising vaccine news: BioNTech-Pfizer; AstraZeneca-Oxford; and Moderna. All companies have shown that their vaccines were safe and effective in Phase 3 trials, indicating significant advances in the race to find a COVID-19 vaccine. In addition to this, some post-election uncertainty dissipated when the US General Services Administration declared Joe Biden the apparent winner of the US election, enabling the formal transition of power from Donald Trump’s administration to Joe Biden’s to begin.
Stock market indexes were also up globally, with the Financial Times Stock Exchange (FTSE) 100 increasing 1.55% on 24th November. Despite this, a significant divergence between US and UK equity markets has occurred over the year to date. While both the FTSE 100 and DJIA saw a significant sell-off in March, in tandem with equities globally, the DJIA is up 3% since January versus the FTSE 100, which is down 16% over the same period. Large-cap US technology stocks included in the DJIA have particularly benefitted from imposed government restrictions amid the shift to online working, which has boosted their 2020 results accordingly. The tech-heavy US Standard & Poor’s (S&P) 500 reflects the extent of investor demand for these stocks – the year to date return is 12%.
However, many analysts and investors criticise the DJIA’s ability to represent the economy. Firstly, the index only consists of 30 US stocks; an insubstantial amount compared to larger indexes such as the S&P 500 and the Russell 3000. Secondly, the stock market in general does not reflect the state of the economy. US stocks have been largely successful throughout the entirety of the 20th century. Indeed, since the start of the millennium, the stock market has outperformed economic growth over this period – the DJIA has returned 154% (noting that US equities were, on average, overvalued in 2000 during the height of the dotcom bubble) compared to US GDP’s 122%.
In conclusion, whilst 30,000 points is an important milestone, it ultimately fails to illustrate the disconnect between US stock markets and the US economy. The economic recovery is far from over and COVID-19’s longer-term headwinds may be yet to fully materialise. The record does, however, represent changing investor sentiment that there may be an end in sight to the difficulties faced by the financial markets and wider economy in 2020.
By Andrew Hopkins
Sector Head: James Float