Despite having not yet hit Dow 30,000, several catalysts should push the 124-year-old index considerably higher up to 40,000 with Biden in the White House.
Volatility is always present in the stock market, but it has been an exceptionally wild year for Wall Street in 2020. The unprecedented coronavirus disease 2019 (COVID-19) pandemic sent the iconic Dow Jones Industrial Average screaming lower by as much as 35% in a span of just 33 calendar days. Although the Dow has regained much of what it lost during the pandemic swoon, the 124-year-old index is still down about 1% on the year, as of this past weekend.
A path has been paved for the market’s oldest stock index to march higher.
There is a very real chance that we could be talking about Dow 40,000 under a Biden presidency. Here are five reasons for investors to be incredibly bullish on the Dow Jones moving forward:
1. Low-interest rates will fuel growth:
The Federal Reserve Chair Jerome Powell made clear that the nation’s central bank had no intention of raising its key federal fund’s target rate before 2024. The Fed remains concerned about the pace and sustainability of the current economic recovery, especially with COVID-19 cases hitting record highs daily.
The Fed’s desire to keep interest rates low suggests there will be ample borrowing capacity available to high-growth businesses.
2. Another round of fiscal stimulus is likely:
There is a very good chance we’ll see another round of fiscal stimulus passed by a Biden White House.
As some of you might recall, the initial second stimulus package proposals from the Democrat-led House and Republican-led Senate came in at $3.5 trillion and $1 trillion, respectively. In the months that followed, the House proposal shrunk to $2.2 trillion, while the White House stepped in and offered a $1.8 trillion proposal. When Biden enters the White House on Jan. 20 — assuming President Trump does not orchestrate a stimulus deal before then — he will have to bridge a much smaller monetary gap than the initial proposals, which should be doable.
If another round of stimulus is passed, it will be a relief for small businesses, and it may even provide a healthy bump up in consumption.
3. A Senate GOP majority would make corporate tax changes unlikely:
Depending on the January Senate runoffs in Georgia, a Republican majority in the Senate would create a split Congress. Just as we have seen for the past two years, Democrats would retain control of the House, and the GOP would hold the Senate.
There is a good chance we will see a stimulus bill passed, as well as normal fiscal spending bills to keep the government running. Chief among them is the plan to increase the peak marginal corporate tax rate back to 28% from 21%.
Donald Trump’s flagship Tax Cuts and Jobs Act slashed the peak corporate tax rate from 35% to a roughly eight-decade low of 21%.
Biden’s plan (lift the peak marginal rate back to 28%) unlikely to become law, businesses can expect a few more years of historically low tax rates and pumped-up profits.
4. Operating earnings tend to expand over time:
History is on the side of long-term investors. Over time, the operating earnings of great companies usually expand, which is what pushes stock valuations higher. The Dow Jones is comprised of 30 well-known, time-tested, multinational companies that have a rich history of profitability. They are the type of company’s investors do not have to worry about when they go to bed at night.
Over the trailing 35 years, the Dow Jones Industrial Average has returned an average of 8.96% per year, not including dividends paid. If the Dow simply stuck to this average return rate with Biden as president, it would take the index to 40,000.
Understandably, the stock market does not always follow its historic averages. But with fiscal stimulus and low-interest rates likely, there’s ample reason to be bullish about the Dow moving forward.
5. The Dow is proactively packed with winners:
Investors should understand that the Dow Jones is a price-weighted index that has been changed more than 50 times since inception.
For example, after years of poor or mediocre performance, oil giant ExxonMobil and Big Pharma Pfizer were removed from the iconic index in August. With the Dow being price-weighted, both companies had grown to have very little sway within the index. Thus, over time, S&P Dow Jones Indices has packed the Dow with companies primed to outperform.
It might sound like a long shot, but Dow 40,000 is very much possible under a Biden presidency.
Dow Jones Long (Buy)
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