The Dow Jones Industrial Average (DJIA) index crossed the 22,000 mark for the first time ever. Even as financial headlines flock to this news, we wonder if this really is reason enough for all the hype.<\/p>\n
Rising +11% this year, the Dow achieved the much-touted \u201cmilestone\u201d last week. A major contributor was Apple\u2019s nearly +5% surge, thanks to the firm\u2019s optimistic projection of its fourth-quarter sales.<\/p>\n
On the other hand, the U.S. Dollar Index is on an extended decline. The USD against a basket of six major currencies has declined -10% year-to-date. This could have been an additional boost to the Dow. That\u2019s because export-oriented, multinational companies make up a larger proportion in Dow than they do in S&P 500 or Nasdaq Composite.<\/p>\n
Does Dow\u2019s New High Mean Anything At All?<\/strong><\/p>\n But is the Dow\u2019s reaching an all-time high level really worth the hype? We don\u2019t think so. The Dow\u2019s crossing the 22,000 mark is nothing more than a manifestation of bullish sentiments. Any high number would have made headlines, and there might be more highs in the coming days. But, these numbers by themselves do not predict securities\u2019 returns\u2019 potential, it is the underlying fundamentals that do.<\/p>\n A common investing mistake is to get overenthusiastic by an index\u2019s record-high level, and wanting to get in on the \u2018party\u2019- which means, buying securities at their peak prices, while fundamentals take a backseat in investing decisions. What then follows is investors timing the market and later burning their fingers in what were actually overheated stocks. Moreover, speaking of the Dow in particular, the index has characteristic flaws that make its record-high levels even less appealing as investment guidance.<\/p>\n First, the DJIA has 30 component stocks \u2013 much less compared to other indices like the S&P 500. That means, the Dow potentially falls short of representing the broader market and the economy.<\/p>\n Secondly and more importantly, the DJIA is a price-weighted index. That means, the higher the price of a company\u2019s stock, the bigger impact it will have on the Dow\u2019s returns. But, that could potentially distort assessment of firms\u2019 respective influences on the broader market. For example, let us compare two component stocks – the Travelers Companies Inc. and Intel Corporation. Travelers\u2019 per share price is close to $130, which is more than thrice that of Intel\u2019s stock price. Due to the methodology used in the Dow\u2019s construction, Travelers gets a bigger weight in the index and its share price moves will impact the Dow three times as much as Intel\u2019s would. Ironically, Travelers is a much smaller firm compared to the multinational behemoth that Intel is. The market capitalization of Travelers is around $35.8 billion, almost one-fifth of Intel\u2019s $171.5 billion! That means, the Dow could be underestimating a bigger company\u2019s influence on markets and the economy.<\/p>\n Bottom Line for Investors<\/strong><\/p>\n The Dow exceeding 22,000 or any mark should not come across as a breakthrough to investors. For one, the index measure has serious shortcomings which make it a less deserving candidate for representing the broader U.S. market. The S&P 500, with its market cap-weighted construction and a far bigger universe of equities, gives a more appropriate representation of the overall market.<\/p>\n Also, in a bullish phase, market indexes touch new highs all the time \u2013 but it is not these arbitrary levels that guide long-term performance of stocks. It is the fundamentals that do.<\/p>\n If you are looking to grow your nest egg, the Dow\u2019s new high should not mean much. Instead, what matters is staying the course with a fundamentally-guided investing discipline. That\u2019s why, at Zacks Investment Management, we emphasize fundamentals more than \u2018headlines\u2019. By leveraging our in-house databases, independent research and tools, we use fundamentals-based analysis to build customized investment portfolios for every client, while taking care of their individual financial goals and risk tolerance.\u00a0 To learn more, give us a call at 1-888-600-2783.<\/p>\n We are also offering a sneak peek into investing strategies perfect for this stage of the bull market in our just-released Market Strategy report. Disclosing facts and predictions on sectors and the broader economy, this briefing will help you to get a leg-up over other investors in leveraging the present economic conditions to the advantage of your portfolio. To get your free copy, click on the link below:<\/p>\n","protected":false},"excerpt":{"rendered":" The Dow Jones Industrial Average (DJIA) index crossed the 22,000 mark for the first time ever. 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