How the media’s singular focus on “Dow 20,000” is distorting investor expectations
December 30, 2016
Since the election of Donald Trump on November 8, domestic equity markets have rallied significantly. And for much of the rally, market pundits (read talking heads) have opined endlessly and with baited breath as to when we will experience “Dow 20,000”.
The trouble with the media’s focus on this arbitrary and largely irrelevant number is that it is distorting investors’ expectations with respect to their own investment portfolios, thereby setting them up for needless disappointment.
Of course the media’s focus on “Dow 20,000” is understandable. All journalists know that their audience wants a “story” and the easier it is to understand, the better. No financial journalist wants to try and explain the inverse relationship between interest rates and bond prices. Not when something like “Dow 20,000” presents itself.
One way to measure the importance, or lack thereof, of the Dow, is to know how many mutual fund managers use it as a performance benchmark. A quick search in Morningstar reveals 1,233 domestic large cap funds investing in “blue chip” Fortune 500-type companies. Just four (4) use the Dow as their benchmark. By comparison, 512 use the S&P 500. The reason is simple. The Dow is highly concentrated and largely antiquated, failing to reflect today’s diverse economy.
A downside to all the attention being paid to the Dow is that it is creating unrealistic investor expectations with respect to their portfolios’ performance. This is because most investors hold a diversified portfolio that typically includes bonds, which makes sense. Bonds play an important role, both in providing income and reducing a portfolio’s overall volatility. Bond prices, however, are negatively correlated with interest rates which have risen significantly since the election, thus leading to negative bond market returns. To put the Dow’s post-election performance in context, through December 23, the Dow returned 9.1%. At the same time, returns for the S&P 500, international stocks, and bonds were 6.1%, -0.3% and -2.7%, respectively.
A more realistic reflection of investor performance, that of a 60/40 portfolio (40% large cap stocks, 20% international, 40% bonds), returned 1.8%. In the context of annualized returns, this is very respectable. The problem, however, is that many investors have developed far greater expectations due to the media’s unrelenting coverage of “Dow 20,000”. This will invariably lead to disappointment when investors meet with their advisors after year-end. So do yourself a favor. The next time you hear about “Dow 20,000”, remember that while it may make for a good story, it is an incomplete one at best.
*60/40 Portfolio comprised of 60% equities (40% Large Caps, 20% Intl), and 40% bonds (40% U.S. Bonds). The asset classes shown in the “Post-Election Performance” chart are represented by the following indexes: Small Caps (Russell 2000, Dow Jones (Dow Jones Industrial Average), Large Caps (S&P 500), Intl Stocks (MSCI ACWI Ex. US), U.S. Bonds (Barclays U.S. Aggregate Bond). As of 12/23/2016. Investment and insurance products and services are not a deposit, are not FDIC insured, are not insured by any federal government agency, are not guaranteed by the bank and may go down in value. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice.