Last week as the Dow crossed 10,000 again, I saw some serious chatter about this milestone, the press celebrating and even the traders on Wall Street wearing Dow 10,000 2.0 caps on their heads. A number of people pointed out that this number gets far more attention than it deserves. Will you do anything different now that Dow broke 10,000? Will you buy more stock, sell your stock? Remember, the Dow peaked at over 14,000 in October, 2007. So what does 10,000 really mean? Nothing at all.
What I really want to discuss is the odd nature of the index itself. It completely ignores the dividends of the underlying stocks. In real life, you just can’t ignore those dividends. By going to Yahoo Finance and looking at pricing on DIA (the Dow Jones ETF), we find that 10 years ago, on Oct 15, 1999 the closing price was 100.00. (equal to a Dow 10,000), but you can see the adjusted close of 82.14 tells a slightly different story. This means that over these 10 years, the Dow stocks are not exactly flat, but have gained 21.74% over this period. Before you dismiss this as trivial, consider that on a million dollar retirement portfolio, this is nearly $20,000 per year on average from these dividends. $20,000 you don’t need to draw from your original principal. If you are still working and in the ‘saving for retirement mode,’ you gain from the benefit of dollar cost averaging, as well as from reinvesting these dividends.
What I’ve ignored in this discussion is the benefit that you’d see from rebalancing your portfolio each year, keeping the stock/bond ratio in a certain proportion in line with your risk tolerance. The subject of a future post.
Joe
Joe,
Indeed, certain round numbers mean absolutely nothing from a purely financial perspective. However, the Dow reflects trade and trade is made by people, who are not merely driven by numbers. You have to acknowledge that some round numbers, whether in stocks, market indexes, cars ($19995), trinkets ($0.95), gas ($1.509), etc, do play with emotions.
True enough, it’s amazing to see the market pussyfooting around round numbers, when they sometimes are resistance points or support points at other times. In this case, the market has been resisting going beyond Dow 10000, often tracing back from it. Eventually, when it broke it, it did it with some gusto, as we’re seeing.
So, I’d say that from an investment perspective, it does signal how optimistic or not the market is whether a milestone is broken or resisted. True enough, not that it should affect one’s long term strategy, but if one happens to be rebalancing his portfolio while the market is courting a milestone, one may wait a few days to see how to bias his rebalancing.
HTH
Dow at 10,000 doesn’t irk or inspire me – it’s just an important technical point for some technical analysts, because it is a certain resistance point – eg., you brought up the important point of 14,000 for the last big high – technical analysts also use sub-points and sub-sub-points, so 10,000 probably meets one of those.
Just as 14,000 means nothing in itself, neither does 10,000 – just an easy way to note another milestone so to speak. It goes without saying, of course, that the number or any Dow number has nothing to do with the actual underlying economy. Media analysts who slip that assumption in are wrong.
Joe, maybe it’s just the contrarian in me, but I get more scared when there is such a frenzy about these types of things! Is it a sign there is a correction looming? We’ll see.
A couple more things: if one considers inflation, the Dow 10000 of 1999 should be the Dow 15000 today. IOW, in spite of the hoopla, it took a massive credit bubble to recover from the Dot.com bust as it reached its peak in 2007. The Dow today is worth only as much as it was in 1997. The fact of the matter is that the market has remained flat after inflation for over a decade now. However, it cost the greatest destruction of wealth of a the last 2 centuries.
Finally, technical analysis wouldn’t work if market movers wouldn’t have computers placing trades at such arbitrary milestones as Dow 10000. After all, today the Dow 10100 became a fierce resistance line. Thousands of traders cannot make a market as predictable as this, only pre-programmed trading can, IMO.
MediaCurves.com conducted a study among 385 viewers of a news clip featuring the Dow Jones Industrial topping 10,000. Results showed that more than half of viewers (57%) reported that the national economy is improving. Despite reports of the improved economic conditions, the majority of viewers (68%) who indicated that the economy was improving also stated that they do not plan to increase their spending. In addition, 42% of the viewers reported that they are currently searching for a job.
More in depth results can be seen at:
http://www.mediacurves.com/Culture/J7600-USEconomy/Index.cfm
Thanks,
Ben