The Dow Jones Industrial average's rally through 30,000 could draw in sidelined cash and broaden market leadership, as investors bet on financials and other underperformers in addition to technology shares.
The Dow rode to 30,000 from 20,000 with a big lift from technology. The top three performers since the Dow crossed 20,000 in January, 2017 were Apple, Microsoft and Salesforce.com, all up more than 230% in that time frame. The Dow soared more than 400 points Tuesday, breaking 30,000 for the first time.
"I feel like every time we get to a big milestone, people ask, 'why aren't I in the stock market?'" said Scott Redler, partner with T3Live.com. "At this point, it feels like this is not going to be a 'sell the milestone'."
Redler said the investment community has widened to include younger investors, and these type of milestones are encouraging. He expects the market to continue to head higher, but its rapid run from the lows may mean it has to consolidate and it could take a little longer to reach Dow 40,000 than it was to climb to 30,000 from 20,000.
Art Hogan, chief market strategist at National Securities, said investors like big round numbers. "It's the knowledge that investors are doing well. It's not just on the front page of the Wall Street Journal. It's in the New York Times. It goes from Wall Street to Main Street. This is something that shows up on everybody's radar. This shines a bigger light on it," he said.
Hogan said the market is looking past the headwinds of the surge in coronavirus cases. "You combine three vaccines heading to the FDA for approval and the fact we have a known commodity as Treasury Secretary and the economic data has not fallen off the cliff," said Hogan. "The headwinds are going to get worse, but this is a market that wants to look past this."
Strategists say technology will continue to be a favorite, but it will be joined by other sectors and stocks that have lagged. Investors have recently been loading up on cyclical stocks like industrials, materials, energy and financials, as sectors that will do well when the economy reopens next year. In just this week so far, financials have gained 5.2%, industrials are up 3.6% and materials are up 3.3%. Technology has only gained 1.2% this week.
Since the beginning of the month, energy is up more than 37% and financials are up 19.4%. Industrials are up more than 18%, while technology has gained a relatively muted 9.4%.
"I think that there's been a real shift in the last several weeks where investors are much more excited about cyclical companies that are really plays on reopening of the economy, given the success of the vaccines," said Jonathan Golub, chief U.S. equities strategist at Credit Suisse. He said interest in energy, industrials and materials will continue for now but he says for 2021, tech and growth could have a rebound and there could also be other sectors that lead.
"I think you could ultimately see a reversion back to the growth stocks that have been driving a lot of the success because they've been driving a lot of the earnings," said Golub. "There are two sectors that have not participated in the upside over the last six months that are likely to do well in 2021. They are financials and health care. They are the two least expensive groups relative to the way they normally trade in the market."
Analysts say in every bull market cycle, there is a period where financials take a leadership role. The improving economy next year should help with lending and major banks have already taken big provisions for loan losses.
"The transition from growth to value, and in that regard financials, in particular, are likely to be leaders, not just to year end, but for much of 2021. That on balance is good for the market," said Julian Emanuel, chief equity and derivatives strategist at BTIG.
Emanuel said the market needs to see fiscal stimulus before the Dow can get much above 30,000.
Financials were middling performers in the Dow's last 10,000 points, except for Visa, up 153% and fourth best performer in the Dow after Salesforce.com's 231% increase. Other financials in the Dow saw much lower gains.
American Express is up 55% since January, 2017, and JPMorgan was up 41%. Goldman Sachs, down 1% in that period, was one of the three Dow components to see a decline. Chevron was the worst performer, down 19%.
Apple was the top performer, with a gain of 277% since Dow 20,000 followed by Microsoft, with a 232% gain.