Sunday, February 19, 2017

The DOW has exceeded 20,000: Does this mean we are in for a period of economic expansion?

From this Forbes article:

"The Dow Jones Industrial Average hit 20,000. The aftermath was a barrage of media stories—some encouraging, others less optimistic. The positive stories prompted investors to buy more equities in expectation of more future gain; the cynics foretold the forthcoming correction with a warning: Get out of stocks. The one common theme all the articles share is that, yes, something is going to happen next. And this something will likely show gains and reverses, followed by more gains and more reverses."

1) Is the DOW an outdated and irrelevant formula?


2) Are we headed towards a period of economic expansion?

3) Should investors care? Should anyone?


  1. I had no idea that the Dow was an indicator made up of just 30 companies. I had thought that it was a more comprehensive determination of our economy considering how widely reported it is. What I got from the articles is that the DOW isn’t a particularly good measure of the health of our markets.

    Primarily, the fact that the Dow weights share price so heavily confuses me. A five percent increase in share price A should be equivalent to a five percent increase in share price B, but that is not the case. For instance, IBM and GE have very similar market caps. However, IBM accounts for about 11 percent of the Dow’s weight while GE is only about 1 percent. Even though these two massive companies have nearly the same market cap, GE has little effect on the Dow, and that can be traced directly to the stock prices. IBM stock is about $180 a share and GE is $30.

    Due to the weighting of share prices, half of the index is accounted for by less than a third of the companies on the Dow. IBM, Caterpillar, Chevron, ExxonMobil, 3M, McDonald’s, United Technologies and Traveler’s have a massively disproportionate ability to change the Dow when compared to the remaining 22 companies. A hiccup in the growth of one of these companies greatly influence the Dow, and would lead to an inaccurate assessment of the U.S. markets.

    The Dow does not account for many massive corporations, and it doesn’t even begin to look into medium and smaller companies. However, there seems to be a decent amount of agreement between the Dow and the Wilshire 5000, a much more inclusive market index, with the Dow being much easier to follow. I’m all for fast-and-dirty info. It’s useful in making quick decisions, and I think this may be the use of the Dow. I’d would probably be a bit cautious trying to get more out of the current Dow score, though.

    1. After the meeting, I don't think my initial impression of the Dow being a moderately useful quick reference of market growth. I also think that the rise of the Dow to 20,000 doesn't really forecast a period of quick economic expansion. I haven't seen any evidence to believe this will be the case.