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Streetwise for Friday, July 24, 2020









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Streetwise for Friday, July 24, 2020

As second quarter numbers come out, now is a good time to remember that a contagion of hysteria can periodically envelope the markets each earnings season. Therefore, you need to stop and assure yourself that you have a solid grip on reality, even if the markets do not. 

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 given the current political situation both here and abroad, combined with the ensuing market volatility? Add to that the constant email reminders I receive reminding me that the markets are too high and are bound to crash. So, what is my answer?

As Little Beaver said to Red Ryder many eons ago, “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 economic conditions long-term. 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. It is too old and creaky.

Furthermore, the industrial portion of the name is largely historical, as many of the current 30 components have little or nothing to do with traditional heavy industry. 

And the index’s performance continues to be influenced by not only corporate and economic reports, but also by domestic and foreign political events such as war and terrorism, as well as by natural disasters that could potentially lead to economic harm, such as COVID-19.

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 have the greatest impact.

Looking at a recent day, shares of Chevron were up $5.95, or 7.0%, while Exxon was up $2.35, or 5.5%. Combined they accounted for about a 57-point increase in the Dow. Other significant contributions came from Nike up 2.90%, Boeing up 2.32%, and Raytheon up 2.51%. 

In general, a $1 move in any one of the 30 components of the benchmark equates to a 6.86-point swing.

So, how is the Dow calculated? If the price of the 30 stocks in the index totaled $3,000, the average would be 3,000 divided by 30 resulting in an index of 100. However, if one stock worth $100 splits 2 for 1, with a subsequent price of $50, the average declines by 50 cents. Thus, the new Dow divisor, to maintain equivalency, must be changed from 30 to 29.5. 

The most recent Dow divisor that I could find is 0.14748071991788. Therefore, for every $1 of change in price for any given stock within the Dow, the average, using the current Dow divisor, is equal to a 6.781-point movement in the market. 

So, what measures should you utilize? The key is potential future economic growth. Although the rate of economic growth can and will fluctuate, and yes, the data has shown not only a slowing of momentum, but the fact that we are in a recession. Nonetheless, with an economy of our size there will always be a cornucopia of possible investment opportunities.

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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