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Dow 30

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U.S. stocks collapsed, erasing all of Wednesday’s gains. The S&P 500, Nasdaq, and Dow 30 index have all rewritten their lows since 2020. The oldest index stopped one step away from a formal bear market. Investors are almost certain: the Fed will arrange a recession in the U.S.

Dow 30 index components: the end of the bearish rally?

The Dow Jones 30 index rally on Wednesday came to an end on Thursday, which is typical of a bearish rally. The Dow Jones Industrial Average fell 2.42%, the S&P 500 fell 3.25%, and the Nasdaq Composite fell 4.08%.

They all rewrote intraday lows from 2020 (the Nasdaq from September and the other two from December). But while the high-tech index and the S&P 500 are already firmly in a bear market, losing about 34% and 24%, respectively, from their all-time highs, the Dow is just getting close to its limit. It is now about 19% below the peak, which is not far from the 20% line after which the time for the bear market is declared.

In fact, of course, the bear market began for most indices back in January, and for the most high-tech, even in November. Their different rates of decline were due to the share of growth stocks and other securities that sold off in anticipation of a rate hike. But the sell-offs are getting wider, and the market is becoming less liquid. And the oldest index obviously won’t escape a formal bear market either, which is a step away.

Dow jones 30 industrial index: recession and stagflation

The markets are now almost certain that a recession awaits the U.S. The S&P 500 and Dow Jones 30 industrial index levels, as estimated by JPMorgan Chase & Co. strategists led by Nikolaos Panigirtzoglou, suggest an 85 percent chance of a U.S. recession amid fears of a Fed error. 

The likelihood of a complete victory over inflation before the recession hits is slim – even if the recession doesn’t start until next year. But U.S. statistics already aren’t too optimistic. The number of new buildings fell 14% in May (a 2.6% decline was expected). The Philadelphia Fed June Business Activity Index fell to -3.3 (the first negative reading since May 2020). And that’s not to mention the University of Michigan’s Consumer Sentiment Index, which last Friday fell to its lowest level in the history of surveys since the 1970s.

That said, the odds are pretty good that Jerome Powell will behave like his predecessors of half a century ago. Which means we can look forward to the stagflation of the 1970s.

What to expect from Dow 30 stock prices today? It was a very bad time for stocks. By the standards of those years, U.S. stocks are incredibly expensive now. On January 1, 1980, the P/E (price/earnings) ratio of the S&P 500, for example, was 7.39. Now it’s 18.53. 

And that’s even though during a recession and further stagflation, the profit margin of Dow 30 current prices will decrease, increasing the value of the ratio. Dow 30 stock prices right now continue to fall. Also you can see Nikkey 225 stock price and Dax index price. So the prospects for further declines in U.S. stocks are definitely still there.

Dow Jones Industrial Average: The Elder of the Stock Market

The Dow Jones industrial average is the first indicator of the U.S. stock market. The index was first published more than 120 years ago, and it has not lost its importance until now. However, the index and its compilers are often criticized.

About 6.5 thousand shares are traded on the leading U.S. exchanges and it is impossible to track the dynamics of each one daily. But investors and financiers need to understand the general state of the market, and stock indices were invented for this purpose. They show how much the price of not all shares, but a certain set of shares has changed on average. Already, on the basis of this sample, investors conclude about general market trends.

It can be compared to a poll: to understand the mood of the society, not the entire population is polled, but a limited number of people – often only a few thousand. True, the difference is that the polling involves random people, while the index includes securities by certain criteria.

There are several key indicators in the U.S. market: the S&P 500, NASDAQ and the Dow Jones Industrial Average, which appeared first. Many traders like this kind of trading more than speculating on commodity prices.

Composition of the Dow Jones Index

Originally, the Dow Jones Index consisted of 12 securities of large companies from various sectors. Not a single security from the original set remains on the Dow today. Some companies were taken over, others went bankrupt, and others declined. General Electric stayed the longest: it was excluded only in 2018. In recent years, demand for GE’s products has been falling, and the stock has fallen in price.

Not only has the composition changed, but also the number of securities in the index. In 1928 there were 30. That number remains to this day. Currently, the Dow Jones Industrial Average Index consists of the following companies.

Procter & Gamble has been on the index for the longest – since 1932; that is, exactly 90 years. Biogen, a biopharmaceutical company. Honeywell, an industrial company; and Salesforce, a technology company, were the latest to be included in 2020.

There aren’t many industrial companies left in the 126-year index – just 16%. This also reflects transforming the economy. Nearly half of the DJI index is now made up of IT and health care issuers.

How the Dow Jones Index is calculated

The Dow Jones Index is price-weighted. This means that each stock is assigned a weight based on its price. The higher the price of a stock, the more weight it receives. Charles Dow originally divided the total value of traded stocks by the number of index components: first by 12; then by 30. But because companies were either splitting stocks or, conversely, joining them, the Dow ratio was introduced.

The Dow Jones Stock Markets Ratio (divisor) can be viewed on the Barron’s website. As of January 30, 2022, it is 0.15172752595384. The obtained value is compared to the previous or base indicator. Thus, a conclusion about the growth or decline of the market is made.

This calculation method is often criticized. After all, it turns out that for the Dow Jones index it does not matter the company’s capitalization, and the main value is the share price. In other words, it turns out that companies with expensive securities get the greatest “weight” in the Dow Jones. Meanwhile, most other indices use “weighting” by capitalization. That is, for example, in the S&P 500, the greater “weight” will be given not to the issuer whose share is more expensive, but to the one whose market value is higher.

For example, in the spring of 2020, Boeing’s quotations halved, while the average market decline was 30%. But Boeing had expensive shares, which made the company’s weight in the Dow Jones index by market cap nearly 10%. That’s why the index itself collapsed more than the market. The S&P 500 gained 14.6%; the Nasdaq Composite gained 42.7%, and the Dow Jones added only 5.8%. The Dow Jones index adjusted for inflation, brought investors the expected gains. 

Dow Jones index competitors by market cap

The main “competitor” of Dow Jones is the broad market index S&P 500. These indicators have a lot of fundamental differences. 

  • Calculation method. Dow Jones uses a “weighting” by price, in the S&P – by capitalization.
  • Composition. The Dow Jones today includes only 30 companies, while the S&P 500 includes 500 companies. Also, Dow Jones does not include issuers from two sectors (utilities and transportation).
  • Company selection criteria. Dow Jones is criticized for the fact that there are no clear criteria for including stocks in the index. It is rarely updated, and the S&P 500 is reviewed quarterly.

But if you take recent years, the S&P 500 overtakes the Dow Jones. That said, the Dow Jones dividend index annual returns more than the S&P 500. The fact that the oldest indicator consists of value companies that consistently pay shareholders explains this.

How to Invest in the Dow Jones Index

The Dow Jones Index is essentially a ready-made solution for the investor – it is a selection of the most reliable securities with stable dividends.

There are several ways to invest in the index:

  • Buy stocks individually. The index consists of 30 securities, so it is not difficult to buy all of them one by one. 
  • Invest in ETFs. There are exchange-traded ETF funds that follow the index. These funds have stocks and are also traded on the exchange. For an article on how ETFs are structured, see Foreign Index ETFs: the basics for making trades.

Briefly

  • The Dow Jones Index Fund Fidelity is the world’s oldest stock market indicator. Judging by its dynamics it is possible to draw conclusions about the state of the US economy, its approaching economic crisis, or, on the contrary, about growth potential. Statistics show that the Dow Jones index is at an all-time high. 
  • The index includes the “blue chips” of the U.S. market, 30 expensive companies from different sectors.
  • The main “competitor” of the Dow Jones index is S&P 500. They have a lot of fundamental differences.
  • The most affordable way to invest in the Dow Jones index by year is to buy shares in an ETF fund for that index.

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