Dow Jones Industrial Average — The Dow Jones Industrial Average
The Dow Jones Industrial Average or DJIA or Dow or The Dow is probably the most watched index in the United States if not the world. That seems a bit odd given it is made up of only 30 stocks and represents only around 20% of the total market capitalization of the New York Stock Exchange (NYSE) and NASDAQ combined.
That appears to be a disproportionate amount of power for one single index. Yes, the Dow Jones Industrial Average has been hitting new highs but so have other indexes. Yet when the DOW sneezes, the market catches a cold.
That is funny given the S&P 500, which includes 500 stocks, is barely mentioned in stock market index quotes on the various news programs and financial radio shows. It would seem the S&P 500 would have a broader impact on the market. But, not according to Wall ST.
Not many people know this but The Dow is not inflation adjusted. This makes comparing today’s Dow number to last week’s Dow number irrelevant. When you go to the grocery store do you compare the price of apples to oranges? I would bet you don’t.
The Dow is price weighted so big companies artificially distort the rise. Most people don’t understand this fact either. To give you an idea of the numbers the Dow Jones Industrial Average is made up of companies like IBM. IBM has a market cap of approximately $233 billion. Do you suspect that a movement, either way, in IBM could artificially distort the Dow?
The movement in the Dow Jones Industrial Average doesn’t actually reflect main stream consumers. Putting that in numbers, just a look at GDP will give you some perspective. The last time the DJIA was at these levels U.S. debt as a percentage of GDP was a little bit under 40%. Today it is smacking 75% in the face.
These same consumers also know that their earnings have been essentially flat for the last five years. Try telling them how important the Dow Jones Industrial Average is in their lives.
Oh yeah, gasoline was $2.75 a gallon on average back then as well. Today, on average, it is $3.73 per gallon. The consumer isn’t too much worried about a 1% or 10% rise or fall in the Dow.
You can thank the Federal Reserve for creating artificially low interest rates and pumping and dumping huge amounts of dollars into the economy. They’ve made cheap money both an art and a science.
Unfortunately that cheap money doesn’t trickle down to the mom and pop businesses located on Main Street America. But it does help to keep the Dow inflated and rising.
If you are an investor you can thank the Dow Jones Industrial Average for blowing some profits into your investment. This may be a good time to take some of those profits off the table and put them into your bank account.
By no means am I implying pull out of the market altogether. I am merely suggesting taking a profit means you will never go broke. The money always looks better in your pocket than it does flowing down some drain on Wall St.
Your next order of business might be to, as the investment advisor types say, redeploy some of your dollars into segments of your portfolio that are trailing. In other words, the situation might exist that you can buy low and sell high because the Dow Jones Industrial Average is letting even the under performers draft its upward movement.
This sounds like you would be chasing performance based on a guess. That would be true if you blindly put money into a loser hoping it will go up. You have to do your homework and believe the trailers in your portfolio have an opportunity to go up based on solid evidence.
The Dow Jones Industrial Average may be a blessing only a few have discerned. If nothing else, it gives us a benchmark for the direction of the market.
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