May 16, 2024 - Business

"Big psychological boost": Dow vaults above 40,000, setting new record

Illustration of a close up of the Wall Street bull wearing a green bookie visor.

Illustration: Aïda Amer/Axios

The Dow Jones Industrial Average touched a record high at 40,000 on Thursday, with investors momentarily downplaying fears about inflation and delayed interest rate cuts.

Why it matters: The market has built on momentum in spite of persistent worries about inflation, and what the Federal Reserve may or may not do in response.

Driving the news: A day after the S&P 500 Index hit a fresh record, the Dow rose as high as 40,051 in early trading, up about 0.3% on the day.

Yes, but: Markets are showing clear signs of frothiness given the growth outlook, with high-risk assets like meme stocks making an unexpected (albeit short-lived) comeback, and Bitcoin not far from a record.

  • Consumer sentiment on the economy remains glum as price pressures stay stubbornly high, which has pushed inflation expectations even higher, and scaled back the timetable of expected Fed cuts (which are unlikely to happen before the fall).
  • High labor costs and general inflation have put pressure on small businesses – the backbone of the U.S. economy.
  • Also, as is often noted, the S&P 500 Index is the best measure of the market's relative health (That benchmark is also perched at a record high).

What they're saying: "Breaking the 40,000 barrier is a big psychological boost for the bears as round numbers hold special significance in people's hearts and minds," says Chris Zaccarelli, Chief Investment Officer for Independent Advisor Alliance.

  • "We are in a Bull Market and people are showing some irrational exuberance (meme stocks) and dismissing bad news (slowing retail sales) and focusing on good news (slightly slowing inflation)."

The bottom line: As is mentioned ad infinitum, the stock market is not the economy, and big moves can be prone to over-interpretation.

  • But it certainly doesn't hurt either, as it influences how some consumers feel about overall conditions.
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