With the Dow Jones Industrial Average stock index breaking above 30,000 once again and the SPDR Dow Jones Industrial Average ETF (DIA) rising on Thursday, at least one analyst now feels that the famed, 30-stock index has the potential to reach the 40,000-point mark by new year, breathing further life into stocks and ETFs.
According to Patrick Spencer, the vice chair of equities at investment bank Baird, the Dow could notch the 40,000 level by 2021.
He explained on CNBC’s “Street Signs Europe” recently that the index holds more value than growth stocks, and prognosticates that value will outperform as growth settles in the coming year. If his predictions are correct, ETFs like the Principal Value ETF (PY), the iShares Morningstar Large-Cap Value ETF (JFK), and the Principal U.S. Small-Cap Multi-Factor Index ETF (NASDAQ: PSC) could stand to benefit.
“So there’s still a lot of despondency, a lot of reticence with regard to going into the market and they are still pretty unloved generally, equities,” Spencer said Wednesday, revealing that discussions at his firm had touched on a possible surprise surge for the Dow. “We talk about maybe 40,000 level on the Dow there next year because of the make-up of that index which is more value than growth,” he added, without giving a detailed target on when that might happen.
Stocks have seen a robust rally since November, buoyed by vaccine hopes and a potential stimulus package in the works. However, Spencer’s call would still mean a hike of almost 34% from current levels.
So what is the logic behind the analyst’s projection? Spencer underscored the fact that there was $6.5 trillion sitting in money market accounts ready to be deployed when the time is right. He also highlighted that despite a recent record investment in stock index ETFs, there has been more people selling out of ETFs this year than money going in, suggesting that cash investors are still waiting to jump into the market, which could fuel more upside.
The performance of value stocks depends on the economy, and stock markets have recently witnessed a transition into value stocks amid the news of coronavirus vaccines from Pfizer, Moderna, and AstraZeneca, driving optimism of a rapid economic recovery.
A research note published by Baird recently, said the bank’s Chief Economist Don Rissmiller envisions “smart” winter lockdowns, targeted stimulus, and the eventual containment/cure of the virus which could all catalyze a robust reopening and explosive economic growth by mid-to-late 2021.
This growth could come from stocks that stand to benefit from the economic reopening, such as entertainment, airlines, cruise lines, and hotels, as well as industrial, materials, and technology. This also means that ETFs like the Invesco Dynamic Leisure and Entertainment ETF (PEJ) could get a boost.
Some analysts are still in disagreement, however. Eric Johnston, head of equity derivatives and cross asset products at financial services firm Cantor Fitzgerald, feels that markets will sell-off in the short term.
“We think that there is a tactical opportunity where we think we’re actually going to move lower in the market,” Johnston said.
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