It is no secret that the stock market has taken off since the 2016 election. It seems that most people refer to “the market” as domestic equities. More specifically, the media usually latches onto the results of the S&P 500 – but that’s often based on what makes the best story. Case in point: I guess the S&P 500 hitting 2,300 doesn’t have the same ring as the Dow Jones Industrial Average (DJIA) hitting 20,000!
Because of that milestone, the DJIA has been getting a lot of press, causing it to rise as the benchmark-du jour for the layman investor. If you have clients walking in the door, asking why their investments haven’t kept up with the DJIA, here are a few educational points to help bring them back to earth:
- DJIA is a price-weighted index of 30 large-company stocks, indicating the index represents a very narrow segment of the market. That makes it a poor barometer of the broad equity market.
- It has underperformed the S&P 500 for four of the last five calendar years.
- Companies with high stock prices, but not necessarily larger market caps, have a greater impact on the index than members with smaller stock prices.
- Just 5 of the 30 stocks in the index, all but one of which was negative in 2015, accounted for nearly 55% of the index’s gains in 2016.
SEI’s head of investment management, Kevin Barr, said it best in an interview with US News and World Report last month: “The Dow represents 30 large stocks. The S&P 500 represents nearly 17 times that number. Both the Dow and S&P leave out the mid- and small-cap companies that form much of the stock market, which comprises thousands of stocks. While the Dow is commonly cited as a benchmark, investors need to keep its size and scope in mind.”
It’s still something
With all that said, we don’t want to completely discount the milestone. Obviously, the market is doing well. The economy has been improving and the expectations are that it should continue to improve. In just under 8 years, the private sector has added an impressive 15.6 million jobs, and in November 2016, the unemployment rate hit 4.6% for the first time since August 2007.
The DJIA 20,000 didn’t cause all that to happen, but that milestone, combined with solid performance from other domestic equity benchmarks and an improving economy, makes everybody feel pretty good. This is the time when we have to reinforce the importance of a diversified portfolio, because what goes up…
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