As The Dow Turns

Those of us who have 401(k) plans regularly check on the stock market indexes to see whether the market is “up” or “down.”  One of the oldest and most well-down stock price indexes is the Dow Jones Industrial Average, which is often called a “blue chip” index because it includes some of the biggest companies in the country.  The Dow, the Standard & Poor’s 500, and the NASDAQ are a kind of financial pulse of the United States, consulted to see whether the economy is robust and healthy or weak and failing.

Most of us don’t really pay attention to it, but the Dow is supposed to represent a kind of reflection of the American economy as a whole.  And because the American economy is ever-changing, that means the roster of companies that make up the Dow has to change, too.  The last remaining member of the original Dow, which started in 1896, was General Electric, which ended a 122-year run in the index in 2018.  Sometimes the changes happen because the companies in the Dow falter, or are acquired, or succeed to the point where their stock splits, which would have an affect on the overall average.  And sometimes the index changes because the American economy is just moving in a different direction.

That point was driven home this week when it was announced that some of the well-known companies in the U.S. are being dropped from the Dow index and replaced by some of the companies in our “new economy.”  Energy giant ExxonMobil, which has been part of the Dow since 1928, will end its run at the end of this month.  In its stead, a company I’ve never heard of called Salesforce.com — described as an “enterprise software” concern — will join the Dow.  Pfizer, the drug company, and Raytheon, a well-known defense contractor, also will be taken off the index list, to be replaced by Amgen and Honeywell.  The changes are being made to account for Apple’s stock split and, according to the folks who run the index, are intended to “add new types of businesses that better reflect the American economy.”

The original Dow included companies like American Sugar, National Lead, Chicago Gas, and U.S. Leather, along with General Electric.  Now we’re talking about “enterprise software” concerns, biotech firms, and diversified technology conglomerates, and they are being added because a company that makes computers, smartphones, and other devices has been so successful that it is undergoing a stock split.  That’s a pretty good indication of how our economy has evolved, and how the evolution continues.

Dow And Up And Dow Again

I don’t know what’s harder to read about right now:  political news, or the stock market.

dreamstime_xl_29871962-customSince I don’t want to lose any readers, we shan’t be talking about political news.  But checking out what’s been going on in the stock market recently is equally stomach-churning.  October has been one of the worst months in the stock market in a very long time, generating talk that we’re in the midst of a dreaded “correction.”  Even after springing back up by more than 400 points yesterday, the Dow Jones Industrial Average is still down almost 6 percent this month, making it the worst month since August 2015.  The news for the S&P 500 has been even worse:  in October its down almost 8 percent, its worst month since May 2010.

And for those of us who aren’t working on Wall Street, the movements of the markets seem random and inexplicable.  Stock are down, then up, then down again — sometimes, all on the same day.  On Monday, the Dow surged upward, then plummeted, and ended up covering more than 900 points in its abrupt mood swing.  You read the reports on the markets that try to make sense of the movements — on Monday, for example, the stated culprit for the downturn was concerns about new trade actions with China, and on other bad days it’s those nefarious “profit takers” — and you really wonder if anybody knows why the markets move as they do.  And this shouldn’t come as a surprise, either:  after all, the markets are the sum of the actions of millions of individual investors, mutual funds, trading bots, institutional investors, portfolio traders, brokerage firms, foreign investors, and countless other actors.  It would be an unusual day, indeed, when all of the disparate participants in the market are motivated by the same news to take the same actions on the same day.

So, what’s a small investor to do?  I think the key is to not overreact, and to realize that investing in the market is supposed to be a long-term thing.  The little guy is never going to have the information the big players do and can’t plausibly time the market or anticipate the abrupt movements.  If you’re in the market long-term, don’t get distracted by the sickening plunges or the big climbs, because you’re really focused on what’s happening over the course of years.  And if you can’t take a long-term view, maybe you shouldn’t be in the markets at all.

Ignoring that stock market app on your phone helps, too.

The Dow Hits 20,000

Yesterday the Dow Jones Industrial Average reached a new high, passing the 20,000 level.  The NASDAQ index and the Standard & Poor’s 500 index also are at all-time highs.

gomez3It’s an interesting milestone, and one that is very pleasing to the millions of Americans who have money invested in stocks or mutual funds.  Investment in the stock market — especially through managed mutual funds — is one way the average American can put money away for retirement and (we hope) earn a decent return on our savings.  Over its history the Dow has been pretty dependable in that regard, overcoming periodic drops and crashes and showing significant long-term increases both in absolute terms and on an inflation-adjusted basis.  That’s why, if you’re taking a long-term view, financial planners will tell you that the stock market is the best place to put your money.

These days, of course, there aren’t many alternatives for the average folks.  The interest rates on CDs are a pittance, and the returns offered by municipal bonds and corporate bonds that used to be the bedrock of retirement planning aren’t very attractive, either.  Investing in stocks in “emerging markets” seems pretty risky, too.  Those are all forces that help to explain why the stock market has been on a prolonged bull market run that has seen the Dow triple in value since it hit its low point in the dark days of March 2009.

Unfortunately, some Americans who might have shared in the Dow’s run-up got out of the market right as it hit its low point.  Gallup has determined that, in 2016, only 52 percent of Americans adults have investments in the stock market, down from the all-time high of 65 percent in 2007.  Obviously, many of those people bolted when the market crashed in 2008 and 2009 and they’ve never come back — perhaps because they are too afraid of another crash, or perhaps because they were so hurt economically by the Great Recession that they simply aren’t in a position to invest.  Those who rode out the sub-prime storm, kept their heads, and kept their investments benefited.  It’s a classic example of why anyone who invests in the stock market can’t try to time the market and has to take a long-term view that follows a long-term plan.

20,000 is an artificial milestone, of course, and we’ll no doubt see downturns in the future — but the stock market remains an important way for the average people to build their retirements and plan for the future.  For those who are in the market, 20,000 is a welcome number indeed.