How Important Is the 23,000 Dow Jones Milestone?
The Dow Jones Industrial Average is having a phenomenal year, with an increase of 18.28 percent since the beginning of the year. The index recently made headlines after passing the 23,000 mark. But how significant was this widely publicized milestone really for the U.S. market?
The Dow Has Been Performing Well Since 2009
Analysts expected this milestone before the end of the year but didn’t expect the rapid climb that took place in October. The bulls have been charging since 2009 due to low interest rates and slow GDP growth, which has drawn investors to company stocks and away from fixed-income securities. It took six months for the index to climb from 20,000 to 22,000 points and only an additional 76 days to reach the 23,000 mark.
What Companies Contributed to This Milestone?
Boeing and Caterpillar contributed with 142 and 121 of the 1,000 points, respectively. Home Depot contributed 97 points, and Goldman Sachs added 87 points to the index.
IBM and UnitedHealth went up after these companies published better-than-expected earning reports, and Johnson & Johnson’s acquisition of the Swiss firm Actelion gave a boost to the stocks of the pharmaceutical giant.
Is the Dow a Good Indicator of the Strength of the Economy?
The Dow tracks 30 of the largest public companies, mostly industry leaders like Disney, Walmart, Coca-Cola, and Pfizer. The performance of these giants is not always representative of the state of the U.S. economy, in part because of their size and in part because multinationals make a substantial part of their profits overseas. This adds other variables to the equation. For example, this year, foreign sales of these companies were strengthened by a weak dollar.
The Dow is also a price-weighted index. This means that the weight that each company has on the index depends on the price per share, not market capitalization. For instance, Pfizer and Johnson & Johnson are two pharmaceutical giants of comparable size. However, because Johnson & Johnson stock is currently worth more than $100 a share while Pfizer stock trades at little over $30 a share, the impact of the performance of Johnson & Johnson on the index is over three times greater than the impact of Pfizer.
Is the S&P 500 More Representative?
The S&P 500 gives gives a more accurate reflection of the state of the U.S. economy because it encompasses 500 companies and uses cap weights. This means each company has the same impact on the index regardless of stock price.
The S&P 500 has gone up almost 15 percent since the beginning of the year. Like the Dow Jones, this index is benefiting from the current bull market and the economic recovery around the globe.
The S&P 500 has its shortcomings, too. A quarter of the index’s gains this year can be attributed to five tech giants: Facebook, Amazon, Apple, Microsoft and Alphabet, Google’s parent company. Meanwhile, retailers like Macy’s, Gap and Foot Locker are seeing losses.
What Do Dow Milestones Really Mean?
The 24,000 milestone is not far off. As the Dow Jones grows, the percentual increases required to reach the next milestone get smaller. In fact, the Dow will have to achieve only a 4.34% gain to surpass the 24,000 mark.
Although these milestones arouse investor sentiment and get attention from the media due to the psychological impact that round numbers have, it is important to remember that three zeros in a row are nothing out of the ordinary and the Dow Jones is not an accurate gauge of the U.S. economy.
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