In 2017 we witnessed the bull market rallying again for another strong year. Positive market gains are one indicator of a healthy economy, but we continue to believe a measured and thoughtful approach to 2018 is crucial. Clients should continue to invest according to plan by keeping their accounts diversified, paying attention to allocation targets and not assuming more risk than is prudent. As the investing environment changes, we will continue to reevaluate and change direction when the circumstances merit.
Every year there are financial buzzwords that permeate the news media and 2017 was no different. We always encourage clients to ignore the noise because the 30-second sound bite does not present the full picture. To illustrate these shortcomings, we are going to dig deeper into two popular buzzwords from 2017: The Dow Jones Industrial Average and Bitcoin.
First, let’s explore the Dow Jones because we hear and read about it in the news daily. The Dow Jones is a price weighted average of 30 significant stocks including companies such as General Electric Company, the Walt Disney Company, Exxon Mobil Corporation and Microsoft Corporation. It was originally designed to be a proxy of the broader US economy, which is why when the TV networks say, “the market is up today,” they are generally referring to the Dow.
We look at the Dow as a trend indicator but not a precise measurement of the stock market because it is a price weighted index. What does this mean? Price weighted means that companies with a higher stock price are given a greater weight in the index. Therefore, the formula used does not reflect the fact that a $1 change for a $10 stock is much more significant (percentage wise) than a $1 change for a $100 stock. For comparison, most other major indexes, such as the S&P 500, are market-capitalization weighted which uses the size of the company (calculated by multiplying a company’s shares outstanding by the current market price of one share).
What does this mean to investors? In a year like 2017, where three stocks drove a huge portion of the Dow Jones return number reported nightly by the news agencies. The numbers can be deceiving. The three main stocks which drove the Dow in 2017 were:
The Boeing Company: stock price was up close to 90% and contributed close to 1000 points of the move for 2017 (Year End Stock Price Per Share $294.91)
Caterpillar Inc.: stock price up close to 70% and contributed nearly 450 points during 2017 (Year End Stock Price $157.58)
UnitedHealth Group Inc.: up 38% for the year and contributed over 414 points. (Year End Stock Price $220.46)
In other words, these three stocks contributed to 1900 points of the Dow Jones total point move of 4956 for 2017 or ~38% of the total move. We do not think three stocks are statistically representative of a 15 trillion dollar US economy and we believe the Dow Jones is a fundamentally flawed index.