2<\/sup><\/strong><\/p>\n\n\n\n_________________________________________________________________________<\/p>\n\n\n\n
I think placing outsized importance on the Dow\u2019s price levels assumes the index is a good proxy for the broad market, and it may also assume the Dow 30 is a strong indicator for the health of the broad economy. But in my view, the index is neither of these things. <\/p>\n\n\n\n
First, I do not see\nthe Dow 30 as a good proxy for the broad market. The Dow is made up of only 30\nstocks, and there are really no detailed guidelines on why a company is\nincluded in the index. A committee of people from S&P Dow Jones Indices and\nThe Wall Street Journal <\/em>ultimately\ndecide which companies to include, and there is no strict blueprint for doing\nso. Though the companies included are large-cap, usually iconic U.S.\ncorporations, the list is far too narrow to offer strong insights about the\nbroad markets. <\/p>\n\n\n\nSecond, the Dow 30\nis a price-weighted index, which in my view is fundamentally flawed. A\nprice-weighted index means that if a stock\u2019s price gets cut in half (think\n2-for-1 stock split), then its weight in the index also gets cut in half \u2013 even though the company is the same size\nafter the stock split. <\/em>A company\u2019s stock price alone tells us very little\nabout the company. <\/p>\n\n\n\nA better way to\nconstruct an index, in my view, is by making it capitalization-weighted. With a\ncap-weighted index, bigger companies end up having more weight and influence in\nthe index, which makes good sense to me. As a company grows in size, its\nimportance in the index and the economy also grow in tandem. But this is not\nhow the Dow works. <\/p>\n\n\n\n
As for the Dow 30\nbeing a strong indicator for the health of the broad economy, the same argument\ngenerally applies. The health of 30 companies is probably not a good\nrepresentation of how the economy is performing as a whole. I think it makes\nbetter sense to look across various, broader, and cap-weighted indices like the\nS&P 500, the Russell Midcap Index, and the Russell 2000 (small-cap) just to\nname a few. I think it\u2019s also worthwhile to look across value and growth, and\nto follow trends across sectors. <\/p>\n\n\n\n
The stock market\u2019s\nrally off the March lows were driven in large part by tech-heavy, growth heavy\nnames. But one of the more interesting trends I\u2019m seeing in the markets today\nis capital rotation into underperforming areas of the market, such as value,\nsmall-caps, banks, and energy. The Russell 2000 index of small-cap names rose\n+18% in November, clocking its best ever monthly gain, and value was one of the\nbest performing categories last month. These are the stories to keep an eye on\n\u2013 not arbitrary Dow 30 index levels. <\/p>\n\n\n\n
Bottom Line for\nInvestors<\/strong><\/p>\n\n\n\nThe Dow Jones is the classic U.S. stock index, with a storied history. But investors would be better served to use the S&P 500 Index as the proxy for large-cap, American corporations \u2013 which also tend to provide useful insight about the market and economy as a whole. The S&P 500 includes 500 companies, with defined criteria for being included, and it is capitalization weighted. It checks all the boxes for proper index construction. <\/p>\n\n\n\n
So, with the Dow\ncrossing 30,000 or hovering around this level, do not focus too much on what\nthat means for the markets and economy or where we go from here. Remember, it\u2019s\njust a number. <\/p>\n\n\n\n
Instead of focusing on this one number, I recommend focusing on key data points and economic indicators that could positively impact your investments in the long-term. To help you do this, I am offering all readers our Just-Released December 2020 Stock Market Outlook Report<\/a>. <\/strong>
This report looks at several factors that are producing optimism right now and contains some of our key forecasts to consider such as:<\/p>\n\n\n\n- Potential impacts of a Biden Presidency<\/em><\/li>
- How Covid-19 continues to impact travel, unemployment, consumer demand and more<\/em><\/li>
- Is it time to buy U.S. stocks in early November? <\/em><\/li>
- Zacks Rank S&P 500 Sector Picks<\/em><\/li>
- The global response to the U.S. Election<\/em><\/li>
- What produces 2021 optimism? <\/em><\/li>
- And much more<\/em><\/li><\/ul>\n\n\n\n
\n\n\n\nIf you have $500,000 or more to invest and want to\nlearn more about these forecasts, click on the link below to get your free\nreport today!
<\/p>\n","protected":false},"excerpt":{"rendered":"
Mitch looks at the Dow\u2019s latest milestone, and whether the index deserves the focus it gets in the media<\/p>\n","protected":false},"author":3,"featured_media":8874,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[63,71],"tags":[],"class_list":["post-9100","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitch-on-the-markets","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9100","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=9100"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9100\/revisions"}],"predecessor-version":[{"id":10495,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9100\/revisions\/10495"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=9100"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=9100"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=9100"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}