The Dow Just Hit 40,000. Here’s Where Pros See Stocks Headed Next.

It took seven years for the Dow Jones Industrial Average to move from 20,000 to 40,000, and it had to bounce back from an April slump to cross the finish line. The 30-component blue-chip index now joins the Nasdaq and the S&P 500 in making recent highs. What is the significance of Dow 40,000, and where does the index, and stocks in general, go from here? We asked financial pros that question for this week’s Barron’s Advisor Big Q.

Kevin Grimes, president and chief investment officer, Grimes & Co.: Dow 40,000 is really nothing more than a round number, a psychological barrier. The more zeros you have, the more important the psychological level. As far as where we go from here, in the short term, it certainly seems like things are pretty good. Stocks are setting new highs, the economy’s strong and handling higher [interest] rates very well. Credit spreads are showing no signs of trouble. Things look pretty calm. Markets could work higher, but there’s always risk. We manage a dividend-growth strategy, and I think dividend growth is probably a good area for equities right now. It’s less loved than the narrow tech market that’s done very well of late. I think there’s some opportunity there in things like consumer stocks, healthcare, and energy stocks.

Mary Ann Bartels, chief investment strategist, Sanctuary Wealth: Earnings are coming in stronger and confirming the rally. This is real. We also have confirmation from the breadth of the market. The naysayers are pointing out that the Dow transports haven’t hit a new high. I am not concerned about that, because our economy is structurally different now. We’re a digital economy, not an industrial and transportation economy. Having the Nasdaq at a new high is more important to me than the transports not hitting a new high.

We think the market will continue to rally into the summer months. Seasonally, we tend to peak in the summer, normally in August, and have the traditional fall correction with a major low in October, followed by a year-end rally. I still think the Fed will try to lower rates at least once before the election if the data allow it. That’s just going to add more liquidity. But they have already done that by easing their balance sheet. We’ve been saying all year that the biggest risks from a geopolitical standpoint are if West Texas Intermediate crude oil got and stayed above $100, and if the Fed had to raise rates. Either would be problematic. But we don’t see either of those things happening right now.

Phil Blancato, chief market strategist, Osaic: I’m more optimistic about the Dow components right now because I think you’re going to favor companies that pay a dividend. The reason is that I think we’re in for a very challenging time from here until at least mid-October. The valuations on the Dow are better than they are on the S&P 500, and to me, that clearly suggests that we have an expensive stock market. And at a time where we’re seeing a slowing in the labor force, retail sales easing a bit, and inflation still being high, that underpinning suggests that we have a period of volatility ahead.

One factor that we cannot get away from is the Fed. We’ve been in this never-ending period of waiting with bated breath for the Fed to make a move, which I think is terrible. But the fact that the market is so predicated on what the Fed will or will not do is not the best-case scenario. And to be honest with you, I don’t think the Fed is prepared [to cut rates]. The earliest would be September, and I have a tough time believing in September. So my thesis is to buy the dividend.

Andrew Krei, co-chief investment officer, Crescent Grove Advisors: There is a psychological milestone element around something like a Dow 40,000 moment where I think it enters the zeitgeist. That can breed excitement among retail investors, but less so on the professional, institutional-allocator side of things. There’s also an element of the round number of resistance among technicians, where whether it’s 5000 in the S&P 500 or 40,000 in the Dow, it’s such a clear round number that people will anchor off it, for better or worse.

But we don’t spend much time looking at the Dow. We look much more at the S&P 500 because it’s a broader representation of the U.S. market and economy. It’s much more comprehensive in terms of having the bigger names like Berkshire, Nvidia, and Alphabet. More generally, we think that if we get a soft landing, Goldilocks environment, that’s generally a good backdrop for risk assets. In terms of the Dow, we think things like financial services stand to benefit in a broadening market scenario. Healthcare is a sector that is potentially ripe for a catch-up relative to megacap growth leadership. Healthcare also has a larger weighting in the Dow relative to the S&P. We think tech is due for a little bit of a sluggish phase versus some of these other things that haven’t done as well.

Patrick Fruzzetti, managing director, Rose Advisors (Hightower): I do think the Dow crossing 40,000 is a benchmark from a historical perspective. I would characterize the market as having an “if it ain’t broke, don’t fix it” mentality. We started the year thinking we were going to have six rate cuts. Now we’re thinking we might get one or two. Yet the market has completely ignored that action. The economy’s doing well, earnings have been performing, there’s a lot of capital spending going on.

When I think about the economy overall, I think the potential issues around interest rates will have an impact. I can’t really say that rates are going up, and I don’t think they’ll necessarily go down. One indicator I find interesting is Strategas Asset Management’s “Common Man CPI,” which is food, energy, shelter, clothing, utilities, and insurance, all things you need to buy every day. And guess what, it’s exceeded headline inflation every month for the past nine months. So inflation is actually going up for the average American. That could create headwinds for discretionary spending and the like. But labor is still fairly tight, so if wages continue to tick up with inflation, we could be in pretty good shape.

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