Please stop worrying about the Dow. You’re not invested in it.

For more than 122 years, the Dow Jones Industrial Average has been viewed as America’s leading stock market index. Retail investors sitting in front of their computers to seasoned Wall Street veterans rely on the Dow to provide a glimpse of the health of the U.S. economy and the strength of its stock market. The Dow is not a modern index. It is old and simple, created more than a century ago by Charles Dow, who co-founded Dow Jones and was the first editor of The Wall Street Journal. For many, this index is synonymous with the American stock market. Today, when someone says, “How did the market do today?” they’re probably asking about the Dow Jones Industrial Average. But the Dow is hardly a reflection of the stock market as a whole. It was useful to follow Charles Dow’s index before we had computers to calculate market movements, but no one would build a stock market index that way anymore. Professionals in the asset management industry don’t use the Dow as a benchmark because they understand its weaknesses. There are many other indexes out there. The S&P 500, for example, does a good job of measuring large-capitalization stocks, and

January 7, 2019 No Comments

Pop quiz: When did the Dow last drop as much as it did today?

Short answer: Who cares? You’re not selling today, so don’t fret. Longer answer: The last time was eight months ago, but let’s put things in context. The Dow dropped by more than 800 points today — an amount that definitely catches attention. But in the grand scheme of things, it’s just a blip on the radar. So, what happened today? Basically, interest rates. Treasury yields have surged lately, specifically the yield on the 10-year U.S. Treasury note. It spiked last month and has continued its rise into October. A rise in yields means higher borrowing costs for corporations and investors. It also makes stocks look less attractive compared to bonds (For the pros out there, higher yields also make stocks look more expensive because of a higher “discount rate.”) On top of that, richer rates of so-called risk-free bonds can attract investors away from equities, which are perceived as comparatively riskier. MARKET CONTEXT Over the past two years, U.S. markets have soared. The Dow Jones Industrial Average gained more than 7,800 points in 2016 and 2017, and has continued rising this year. Dramatic numbers reported during the volatility of the first days of February kicked off a rockier 2018 than

October 10, 2018 No Comments

Why stocks still look cheaper than bonds

Recent U.S. equity market weakness and volatility likely has some investors wondering if they should cut their exposure to stocks in favor of fixed income/bonds. But by at least one metric, such a move could be premature. Stocks remain inexpensive relative to bonds, and while the premium they offer has been steadily dropping for years, the argument in favor of equities doesn’t look likely to reverse soon. Equities are cheaper than bonds when stocks yield more, and that continues to be the case. When you compare the S&P 500’s earnings yield against the yield offered by fixed income investments (i.e., investment-grade corporate bonds), stocks look cheaper than bonds. And if you’re an investor, you want to buy when things are cheap in order to take advantage of more potential upside performance. According to WSJ Market Data Group, the S&P’s current earnings yield is more than 4%. Investment-grade corporate bonds, as measured by the iShares iBoxx $ Investment Grade Corporate Bond ETF yield 3.4%. The view comes after a whirlwind six months for the U.S. stock market, a period that has seen equities hit repeated records before logging the longest correction for major indexes in a decade. The past six months

July 10, 2018 No Comments