Dow May Hit 40,000 Level Next Year, Baird Analyst Predicts

The Dow Jones Industrial Average may touch the 40,000-point mark in 2021, nearly a third more than its close on Tuesday, Patrick Spencer, vice chair of equities at investment bank Baird, told CNBC.

On Tuesday, the index closed at 29,783 points. It has registered a rise of more than 4% through the year despite the COVID-19 pandemic. Pharmaceutical stocks have seen a surge in the past few weeks as positive news regarding the vaccine comes in.

Spencer said that discussions at Baird are predicting a surprise surge for the Dow in the coming year, without pointing at a definite headline. “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 said. This prediction would mean a surge of nearly 35%.

Spencer expects value stocks of the index to outperform while the growth stocks stabilize. “There is still a lot of despondency, a lot of reticence with regard to going into the market and they are still pretty unloved generally, equities,” he added.

Value stocks are those believed to be trading below their true value and are expected to deliver superior returns when the market realizes their potential. Growth stocks, on the other hand, are those who show strong market growth continuously -- tech stocks, for example.

Spencer said people are “hiding in cash” and believes markets may surprise investors in 2021. He thinks the Dow Jones’ rally will last into the next year, and said about $6.5 trillion was held up in money market accounts via short-term debt and cash. More people, he added, are selling out of exchange-traded funds this year than money going in, despite recent record investment in METS, which track stock markets.

The report quoted a note by Baird that said precautionary winter lockdowns, the stimulus package, a possible vaccine or containment of the virus may lead to a blockbuster opening of the market and strong economic growth by mid-to-late 2021.

Baird is further keeping an eye on BEACH stocks — bookings, entertainment, airlines, cruise lines and hotels — as these stocks may rally after news of an approved COVID-19 vaccine.