Dow 25,000: Should We Care?
I’m not sure about the regular media outlets but I know the market commentary in our world has given Dow 25,000 its due. Some interesting points have been bantered about: How did we get here so fast? Why has the Dow seemed to rise faster than the S&P 500? Many investors have wondered why the Dow (made up of 30 large slow-moving stocks) is outperforming their investment portfolio? I know an article about the Dow right now is redundant, but we will try to answer the above questions rather than simply report the numbers.
First, to understand the meteoric rise of the Dow, one must have a general understanding of how the Dow moves. This starts with knowledge of a price weighted index (Dow Jones Industrial Average) versus a market cap weighted index (S&P 500). Not all indexes are created equally. With a basic understanding of the different indexes, one can ascertain why indexes do not all move in unison.
- The Dow, a price weighted index, adds the market prices of each of the 30 Dow stocks and divides this total by 30 (the number of stocks in the index). The divisor must be adjusted for stock splits and other changes in the index portfolio to maintain the continuity of the index over time. Because the index is price weighted, a percentage change in a high-priced stock will have a relatively greater effect on the index than the same percentage change in a low-price stock. As discussed later, Boeing (BA) has been the largest contributor to the recent rise in the Dow and Boeing is a $300 + stock.
- The S&P 500, a market capitalization index, is calculated by summing the total value (current market price of each individual stock multiplied by the number of shares outstanding) divided by the base period number and then multiplying by the 100. Because the index is market cap weighted the companies with the most shares outstanding can contribute more to the value of the index. Bigger companies typically have more shares outstanding then smaller companies which gives more weight to the largest companies in the index. The highest cap weighted companies on the S&P 500 are Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), and Facebook (FB). Collectively these stocks make up around 10% of the S&P 500.
Which stocks were the big contributor to the latest 1,000-point rise: Boeing ($310) added 136.8 points, Caterpillar ($166) added 125.9 points, Home Depot ($192) added 73.6 points, Goldman Sacs ($251) added 63.3 points and Chevron ($128) added 62.8 points. Boeing has fueled the rise since the Dow hit 20,000: Boeing has contributed 898 points, more than any other Dow 30 stock. The antithesis of Boeing has been IBM which is responsible for losing 114 points, not the best of days for “Big Blue”.
The Dow took 483 trading days (2015 to 2016) to move from Dow 18,000 to Dow 19,000 and only 280 trading days to move from Dow 19,000 to Dow 25,000. The move from 24,000 to 25,000 was the fastest of the 1,000-point gains taking only 23 days. The other fastest 1000-point moves took 24 days each; the move from 10k to 11k in 1999 and the move from 20k to 21k last March. The move also produced the lowest return which is part of the explanation as to how we keep hitting new highs faster; each new 1,000-point gain creates a diminishing return from the previous gain (see chart below). Wall Street has stopped producing commemorative hats to mark the milestone achievement because 1,000 points just ain’t what it used to be!
Not all 1,000-point gains are equal –
10,000-11,000 = 10.00%
18,000-19,000 = 5.56%
19,000-20,000 = 5.26%
20,000-21,000 = 5.00%
21,000-22,000 = 4.76%
22,000-23,000 = 4.55%
24,000-25,000 = 4.17%
Should the S&P 500 hit the next 1,000-point level it would reach 3,000. A move on the S&P 500 from 2,000 to 3,000 will equal a 50% increase! This may be why financial firms follow the S&P 500 and news media outlets follow the Dow. The impressiveness of the moves collectively of both indexes, without a major decline, is currently the noteworthy point. The evidence shows the long term bull market is still intact and already off to a fast start in 2018!
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