Jan 25, 2017

Dow 20k! So what?

The Dow Jones passed 20,000 on Wednesday, hitting it's first record high in more than a month.

Don't get too excited: The Dow Jones Industrial Average may be famous, but it's usefulness as an economic indicator is limited. It's a simple average of just 30 large American companies, meaning that higher-priced stocks can skew the reading.

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S&P 500 hits a record high too: The S&P 500 is a better read of overall investor sentiment, and that index has performed well of late.

Why all the excitement? Traders are banking on help from Washington, particularly in the form of corporate tax breaks. But earnings have been strong this quarter too, after more than a year of stagnant profits.

Measures of the overall price of the stock market—like stock market capitalization relative to GDP—show that stocks are pricey today. Investors beware.

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