Streetwise for Friday, August 18, 2017:
“Two things are infinite: the universe and human stupidity; and I am not sure about the universe.” Albert Einstein
A contagion of hysteria periodically envelopes the financial markets; so, now is a good time to stop and get a grip on reality. Yes, the criers of doom have a field day with each market hiccup, even if it is just for a day or two. It appears that Chicken Little was an amateur and Einstein had it right, human stupidity is boundless.
Therefore, I continue to find myself taking a contrarian position to the veritable din of doomsday commentary emanating from the proponents of impending disaster, as they alarm the populace needlessly; a replication of Chicken Little’s playbook.
Now I know what you are thinking, do I really have the temerity and audacity to suggest investing in equities with the Dow Jones Industrial Average over 22,000? As Little Beaver would say to Red Ryder, “You betchum Red Ryder.” In fact, I believe in equities as much today as I ever did. The blue-chip shares on Wall Street are now, and will always remain excellent investments over a two to three-year time frame. Period. Clear enough!
Although the continual talk of a major pullback damages consumer confidence, the day-to-day fluctuations of the equity markets do not necessarily reflect what is happening in the real economy here or abroad. And investors are never mortally wounded by short-term share price fluctuations.
Moreover, whenever there is volatility, what always seems to come to the forefront is the Dow Jones Industrial Average. This index is simply not a good market barometer.
Yes, the Dow is up more than 18 percent over the last 12 months, a spectacular return. However, that does not tell the whole story. Especially when you consider that Boeing accounts for about one quarter of the Dow’s entire 2017 increase.
Boeing’s contribution is almost double that of Apple. Yet Apple is the most valuable company in the entire stock market. Apple’s market capitalization (share price times the number of shares outstanding) is more than $800 billion. Boeing, while hardly small, has a market capitalization of only about $135 billion.
The Dow is not a modern index. It is old and creaky. Created more than a century ago by Charles Dow, co-founder of Dow Jones and the first editor of The Wall Street Journal, the Dow continues to be synonymous with Wall Street. If someone says, “how did the market do,” they are usually referring to the Dow. Professor Jeremy Siegel has said in the past, “It’s a crazy way to measure the market.”
The Dow is comprised of 30 stocks and the measuring system is so simple it almost seems arbitrary. Stocks are weighted only by price. That means that the highest-priced shares, in this case Boeing, have the greatest impact.
Consider the Dow’s current makeup. Boeing recent weight, based entirely on the price, accounted for 7.3 percent of the index. Close behind was Goldman Sachs at a 7.07 percent, 3M at 6.47 percent, United Health at 6.04 percent and McDonald’s at 4.91 percent. Apple was in sixth place in the Dow, with a weighting of 4.85 percent.
Because of this price-weighting system, Boeing has more than nine times the stature in the Dow as General Electric. Yet G.E.’s total value, its market capitalization, is much greater than Boeing’s. No matter. Boeing has a far larger impact on the Dow, and the “market,” if you are using the Dow as a benchmark, than G.E.
A better determinate of short-term and long-term market direction is the S&P 500 index. Here at least the weighting is market capitalization. However, it is also not a crystal ball. While there is no Holy Grail, a more accurate indicator of market direction is an index of our nation’s economic growth, i.e., its gross domestic product (GDP). A key driver of GDP is the Fed’s monetary policy, which remains quite accommodating.
Translated, there is a cornucopia of companies with excellent track records to invest in. If you can convince yourself to hold those investments undisturbed for a year or two, it is likely you will chalk up annual returns that exceed those of any market index.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.
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