Dow 16,000: Is It Too Soon?

The Dow Jones Industrials closed Friday just below 15,962, just short of what many have pegged as a key milestone of 16,000. Yet with the Dow having hit new record highs throughout 2013, some wonder whether the bull-market run has come too far too quickly. If the Dow hits 16,000 next week -- which seems increasingly likely given the market's behavior recently -- will it be a sign that stocks are too frothy and that the long-awaited correction that many have anticipated will finally come?

Who'll win: the bull or the bear? Source: Wikimedia Commons.

When milestones are few and far between
From one perspective, it seems it's far too soon for the Dow to be hitting another milestone. When the stock market reached Dow 15,000 in May, it marked the end of a nearly six-year wait for the Dow to climb 1,000 points -- just 7% -- from its previous milestone. Similarly, it took the Dow more than seven years to go from 11,000 to 12,000, and over 15 years to double from 1,000 to 2,000 in early 1987.

When you look at the average gains for the Dow over the past 40 years, you come up with a figure of about 7%, excluding dividends. That doesn't reflect your total return from investing in the Dow's 30 component stocks, but it does measure the pace at which the average rises over time. In that context, the 6.7% rise that's necessary to go from 15,000 to 16,000 should take a bit less than a year. That makes the six months that have passed since Dow 15,000 seem short by comparison.

When milestones come fast and furious
But the Dow has gone through periods of even faster growth. In the mid-1990s, the Dow hit new thousand-point milestones more than once in several years, despite the fact that the percentage gains required to reach each new level were much bigger than they are now. It took nine months to go from Dow 4,000 to 5,000, less than a year to go to 6,000, and then just four months and five months respectively to reach the next two milestone marks.

The fastest Dow milestone came in early 1999. The Dow went from 10,000 to 11,000 in just 35 days. In the end, that would mark the final new thousand-point mark of the millennium for the Dow.

The only thing that's really clear from looking at the history of the Dow is that you can't draw hard and fast conclusions about how quickly the next big Dow milestone will arrive -- or whether when it does, it will come too soon for its own good. Because of that inherent uncertainty, your best course is to find ways to stay consistent with your investing strategy and remain prepared for passing the next big Dow milestone, regardless of whether it comes when the market is rising to new heights or falling back through previously reached levels.

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