The Dow Jones industrial average is on the verge of passing 20,000. The Dow crossed 10,000 in March 1999, but moved up above that level for the final time in mid-2010.
That’s right. It took 10 years for the Dow to decisively move above 10,000 and not look back.
What got us from 10,000 to 20,000? This is the primary reason: Federal Reserve policy.
I have no idea where we would be without very aggressive Fed easing, but everyone I talked to believes this is the No. 1 reason we have experienced one of the great bull markets of all time.
The S&P 500 is up about 200 percent from the start of the bull market in the first quarter of 2009 through the middle of this year. By keeping rates low for so long, the Fed forced investors into riskier assets such as stocks and high-yield bonds, and helped create a new acronym: “TINA” or there is no alternative (to owning stocks).
The fall in global rates due to coordinated central bank easing had two effects on stocks: 1) it allowed a multiple expansion, which helped investors to buy low and sell high and often happens in a low rate environment; and 2) it boosted earnings growth.
Low rates also allowed corporations all over the world to restructure their balance sheets by selling record amounts of debt, which they used (largely) to buy back stock and pay for increased dividends. Some of it also was used to engage in mergers and acquisitions activity.
Don’t forget that cheap money also helped the oil and gas industry pay for a historic expansion of exploration and production activity, which has helped push the United States toward energy self-sufficiency.
To be sure, there were several secondary reasons the Dow is on the cusp of 20,000:
1) Financial engineering. Despite poor revenue growth, from 2010 on corporations became very adept at improving their bottom lines by cost-cutting and investing in new technology. As noted previously, that record amount of debt corporations sold was largely used to buy back stock and pay for increased dividends; and
2) the Trump victory. This is the only event that we can attach a hard number to. The Dow has added roughly 1,600 points since the election on hopes for lower taxes, repatriation of cash, less regulations and fiscal stimulus. So the last 1,600 of the 10,000 points, or 16 percent, can be attributed to expectations for a better macro environment.
There are several other factors also contributing to the rally: a slow improvement in the U.S. economy; stabilization in China after a difficult 2015; stabilization in Europe after the 2011 crisis; and oil finding a bottom earlier this year.