The Dow hit a record high! So what?

The Dow Jones Industrial Average hit a new high on Thursday, crossing 40,000 points for the first time. At Marketplace, we always say that the stock market is not the economy. But it can say something about how certain people think and feel about the economy.

So, if the stock market is not the economy, then what is it?

“The stock market is approximately the market’s expectation of the publicly traded firms within our economy,” said Kelly Shue, a finance professor at the Yale School of Management. She said the Dow’s performance means traders think the outlook for companies is good, or at least less risky. 

And sometimes, yes, that means the outlook for the economy is less risky too.

“They rhyme. They’re cousins,” said Ryan Detrick, chief market strategist at Carson Group, about the Dow and the economy.

For example, traders are happy about the slowing inflation numbers and advancements in artificial intelligence.

But the stock market and the economy can also have about as much in common as you have with your second cousin twice removed. Like back in May 2020, we were living in a pre-vaccine pandemic and unemployment was over 13%. Meanwhile, markets were climbing. 

So let’s regroup for a second. Why then do we care about the Dow hitting 40,000?

“Listen it’s not honestly all that different from 39,999 technically. But it is a psychological level,” Detrick said.

Psychological because it’s a nice, round number and because the Dow is a decent indicator of how the markets are doing in general. 

“When I turn on ‘Marketplace’ and I hear that the Dow has gone up 1%, most other stocks have probably gone up somewhere in that vicinity,” said Jim Angel, a finance professor at Georgetown University.

What does all this mean for you? Well, if you’re not invested, then nothing. And if you are? The Dow’s performance itself still might not matter, unless you own some pricey stocks. Just 30 legacy companies, like Microsoft and UnitedHealthcare, make up the Dow.

“It’s the granddaddy of all stock indices,” said Angel.

And just a slice of the market.