What Does 2017 Hold for the Dow?

By Dan Caplinger Markets Fool.com

The Dow Jones Industrial Average (DJINDICES: ^DJI) is the most-followed benchmark of the stock market, and its performance over the past eight years has been monumentally strong. With the Dow having tripled since early 2009, some investors fear that the long bull market might be overdue to end, while others point to prospects for new economic growth to drive the expansion further forward. Below, we'll look at a few things that we do know about what will happen with the Dow in 2017 as well as some predictions about things that aren't as certain.

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Image source: Getty Images.

Why the Dow 30 might change this year

One thing that's a definite possibility for 2017 is the prospect for a change in the 30 stocks that make up the Dow Jones Industrials. The most immediate potential change could occur from the proposed merger of chemical giant and Dow component DuPont (NYSE: DD) with industry peer Dow Chemical (NYSE: DOW). The two companies agreed in late 2015 to a merger of equals, with the intent of breaking the combined business up into three separately traded companies following the merger. Currently, the merger is still under review by regulators in the European Union, but DuPont and Dow are still hoping to close the deal early this year.

If that happens, then the Dow Jones Industrials will have a couple of choices. The post-merger company intends to break into a specialty products company with $13 billion in revenue, an agriculture company with $19 billion in revenue, and a material sciences company with $51 billion in revenue. The largest of these -- which Dow and DuPont call "a pure-play industrial leader consisting of DuPont's performance materials segment as well as Dow's performance plastics, infrastructure solutions, consumer solutions, and performance materials and chemicals segments -- could presumably remain in the Dow Jones Industrials. Indeed, the revenue figure would be higher than DuPont's current trailing figure of just $25 billion.

Alternatively, the Dow Jones Industrials could take the opportunity to make a shift away from chemicals. DuPont has been in the average since 1935, and it is now one of the smallest components in the average by market capitalization. Nevertheless, it is useful to have some chemicals exposure in the industrial average, even if the Dow Jones Industrials aren't nearly as industrial as they were in the past.

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Rising rates won't necessarily crush the Dow

Some investors have been especially nervous about the recent move higher in long-term interest rates. With the Federal Reserve having made another interest rate hike in December and suggesting that several more could come later this year, those who fear higher rates believe that the Dow could end its bull-market run in 2017 as a result.

However, there are a couple of reasons why this might not come to pass. First, investors anticipated higher interest rates in 2016, but early signs of increases quickly gave way to less aggressive handling of monetary policy from the Fed. Second, even if rates do rise, there have been plenty of situations in which stock markets have kept rising. The most recent was in 2013, during which 10-year bond yields climbed from 1.8% all the way to 3%. Yet that year was the strongest for the Dow throughout the entire bull market, taking the average from 13,100 to 16,575 and posting a gain of 26%. Investors shouldn't assume that macroeconomic indicators alone will predict the market's course.

Volatility is likely to rise

Finally, even though the direction of the Dow is uncertain, investors should prepare for greater amounts of volatility. With a new president taking office, changes in policies are going to be dramatic, and the impact on various stocks -- both positive and negative -- will be substantial. Investors will find themselves constantly reassessing the investing theses in light of changing conditions.

Investors shouldn't be shocked to see more triple-digit moves in either direction on a daily basis. After all, with the Dow at 20,000, a 100-point move is just half a percentage point. It'll take some getting used to, but more extreme volatility should actually open up some opportunities for long-term investors who are more than willing to pick up shares of their favorite stocks when they become attractive on a momentary drop downward.

No one can read the future, and the prospects for the Dow Jones Industrials in 2017 are even cloudier than normal. However, there's little reason to believe that there's any threat to the long-term success that stock market investors have had by following their investment strategies both in years that the average rises and when it falls.

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The author(s) may have a position in any stocks mentioned.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.