Disregard Dow 20,000
By Carmel Fisher, Managing Director
07 February, 2017
Did you notice the headlines about the Dow Jones index hitting the 20,000 mark during January? In New Zealand it wasn't a big deal, but for Americans this was massive news ... in the days leading up to it, on the day (25th January), with breathless hour by hour commentaries, and in the days following. So what is the big deal about the Dow hitting 20,000?
According to most media commentaries the 20,000 mark is an "emotional milestone". The Dow is the oldest stock market index in the US and American investors watch it and will invariably quote the Dow when asked how the market is doing. The media love big numbers with lots of zeros, and so do a lot of investors, so the 20,000 mark certainly attracted attention.
However, a bit of perspective is required. The Dow is based on the share prices of just 30 of the largest companies in the US and the index is price-weighted so that stocks with higher share prices carry more influence. Currently, Goldman Sachs is the largest weight in the Dow Jones index at 8.4%. Cisco Systems has the lowest weight at 1.3%. So if Cisco jumps 10% but Goldman Sachs falls just 1%, the two cancel each other out as far as the Dow is concerned. This is despite Cisco being a much larger company than Goldman.
With just 30 randomly selected companies, the Dow lifting 1,000 points doesn't tell us a lot about anything.
The other thing is that 1,000 points on the Dow does not mean as much as it used to. When the Dow doubled from 1,000 to 2,000 in 1987, that move represented a 100% advance. But a climb to 20,000 from 19,000 represents a relatively ordinary 5% rise.
There is no doubt that the 20,000 mark is symbolically important, but that's where it ends. Like all index milestones, it tells us where we are, not where we are headed.