With 2018 coming to a very rocky close featuring large daily swings, keeping perspective—and remaining cool—is a challenge many investors face. Yet in our view, it is critical. And in that mission, many financial pundits won’t assist, instead trying to get attention with big-seeming claims and fearful stories. Here is one tool to try and help you: Ditch the Dow-point focus.
Headlines often describe market movement in Dow point terms. When stocks swing 100, 200 or 500 points, that may sound big! Far bigger than 0.4%, 0.9% or 2.2%, despite those being the same, based on the Dow’s close of 22,445 on December 24, 2018. We saw this nearly daily in late 2018 as headlines often shrieked over the Dow losing more than 500 points in a single day and its first-ever 1,000-point rise on December 26.
Focusing on point swings ignores how stock indexes grow and change over time. Though 500 points is an easy-to-digest, round number, that move isn’t what it used to be. The Dow’s first 500-point daily move was on October 19, 1987: the “Black Monday” crash, when the Dow dropped 508 points. But because the index was much smaller then, that point decline equaled a massive -22.6% drop—still the largest daily move in percentage terms. Today’s Dow would have to plunge more than 5000 points in a single day to match Black Monday’s percentage decline.
Thanks to compounding multiple bull markets, the Dow has grown considerably over the past three decades. A result of that growth: 500-point swings are becoming more and more common. From 1987 – 2007, the Dow grew from 1,895 points to 13,265 points.[i] During that 20-year period, the Dow had a total of five 500-point days (either up or down). During 2008—the bulk of the bear market that accompanied the global financial crisis—it endured 10. Before 2018, the bull market starting in 2009 featured seven days of 500-point moves—with the last one in 2016. In 2018, there have been 20 as of 12/26/2018! But when your stock index base is much larger, 500-point moves aren’t as rare.
Scaling exercises aside, we don’t think the Dow is a terribly helpful stock index for investors to track. As one of the oldest and most recognized stock indexes globally, many mainstream media outlets treat it as a proxy for the broad US stock market. But it is a flawed index in our opinion—for a number of reasons. It consists of only 30 stocks—less than 1% of all publicly traded US firms. We find it difficult to argue this tiny number of stocks is representative of the entire US equity market.
The Dow’s biggest shortcoming, however, is that it is a price-weighted index. This means a company’s share price—rather than its size—determines its clout within the index. In our view, market capitalization-weighted indexes—which weight constituent stocks by share price times shares outstanding—provide a better sense of a firm’s overall size, making them more telling gauges. Under these criteria, we believe the S&P 500 serves as a better proxy for large US stocks.
So for a clearer view of markets and market movement, we think you should graduate from the Dow—and from thinking in Dow points. It won’t mute all the emotions prevalent in volatile times, but it can help you sift through headlines better.
Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.
[i]Source: Global Financial Data, as of 12/20/2018. Dow Jones Industrial Average Index, closing level on 12/31/1986 and 12/31/2007.
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