Dow Jones Sanity Check

[ProfessorGAC]

We have lots of posts bemoaning the DJIA going up, about every other day. There 3 this week.
Without getting into any economic or financial minutia, folks can calm down a bit.
Why?
As of 1:50pm today, it's down 2.56% since Monday at 9:30am.
It's only up 0.73% in a month, but this was a month in which 23% of the overall economy that was closed reopened partly in some places, totally in others.
And it's down 12.83% YTD.
The market is not performing impressively.
It's not doing enough to make PINO look good.
And, it's underperforming the last the 6 years of Obama.
Don't waste time wondering it's not 15,000.
It shouldn't be that low, and it's only a pinch higher than economic models suggest. (Inside the 95% confidence interval)
The message is, it isn't that good and Obama did better.

[Newest Reality]

1. The market is not the economty. Just my POV.

[ProfessorGAC]

7. Never Said It Was

What's your point?

[Newest Reality]

14. Never said you said that.

Did you take it personally?

[kurtcagle]

2. More info?

I'm curious as to which economic models you're looking at. I agree with all of your assertions, though I suspect we still may revisit the lows we saw in March assuming something of a perfect storm in September. I see us at a forced transformation standpoint - we've essentially pushed forward advances in adoption that likely would have taken place naturally over the next five years in a matter of months, and any time something like that happens, it causes earthquakes. and increases volatility.

[ProfessorGAC]

10. Models

Econometricians analyze market behavior as they relate to indexed firms financials like profit, margins, employment stability, cash flow, external asset performance, regulatory intervention, debt service, dividend fraction, relative credit worthiness, ROIC (as compared to peer group), etc.
They use those to predict what they call market value equilibrium. That's the point as which, using data, they can measure the under or over valuation of the big market indices.
These models are used to guide institutional investors to decide when to buy or sell or when to hold tight.
I did some of this modeling in biz school in the 90s and was a member of a major economics club. I knew a half-dozen of the folks who do this for a living.
They don't intend to predict anything. They just update with most recent data to make large investment decisions data driven.

[kurtcagle]

18. Thanks

I follow economics as a data journalist, but I'm not an economist, so what I know of the field is largely based upon what's in the news and data nets.

[brooklynite]

3. My AAPL hit a record high...

My investments are doing fine overall.

So are the Union pension funds

[ProfessorGAC]

8. A Reply Without A Point?

I said they went up. Just less than the last 6 years of Obama.
How did you miss that?

[brooklynite]

16. "folks can calm down a bit. "..."The market is not performing impressively. "

Whether or not it helps Trump, I've never understood people here who look at a weak market as a positive.

[muriel_volestrangler]

4. The market (the S&P 500, not the stupid Dow Jones) is at the level it was a year ago

and that's with a pandemic taking perhaps 8% off American GDP for the year, and screwing up world GDP, travel and trade too. Plus killing people. And ruining some sectors that rely on close crowds shouting at each other, like sports and bars, or breathing each other's exhaled breath for hours, like airlines.

There's no reason to think it was undervalued a year ago. Which indicates it's overvalued now.

The only bit of good news is that Trump is getting spanked in the polls, which indicates a return to government competency in Jan 2021.

[ProfessorGAC]

9. That Makes No Sense

If it's the same as last year and not undervalued, how does a year make it overvalued at the same number?
July to December 2019, there was no COVID and no mass death and no severe disruption.
So, zero growth would be the opposite of "good" and what it does historically, year over year.
Your logic that the same number showing zero growth in a year makes the value overstated is illogical. Zero is bad!
And, the total valuation of S&P is $28.125 trillion. DJIA is $8.3 trillion, but those companies are also in the S&P. Naturally, with hundreds more companies, the S&P is higher. Your promotion of one over the other doesn't seem apt.
Lastly, I used the DJIA ONLY because the "market went up" posts were talking about the Dow. I was comparing apples to apples.

[muriel_volestrangler]

11. Because the past 6 months have been shit

Imagine I buy a new car. Nice and shiny, all in one piece, no rust. All in the designed shape. I say it's worth $20,000. A year later, it's been in a crash, someone's spilled coffee on the seats, and the aircon doesn't work. If I tell you "it's worth $20,000 stil", I'd be overvaluing it.

Get it?

The point about the Dow Jones index is that it is a stupid index, with an arbitrary weighting, and not related very well to either the larger stock market valuation, or the economy. This is why practically no one sells ETFs based on it.

" Naturally, with hundreds more companies, the S&P is higher."

WTF? I can't believe you just typed that.

[uponit7771]

5. No, we should be below 15,000. The market is a bond squeeze cause there's no were else to get

... yield and no one wants to be caught currently with over valued equities.

The current valuations are horrifically high ... this is another bubble seeing there are some tech stocks carrying all major indexes but its created cause the feds poring money into bonds.

[ProfessorGAC]

6. That Just Wrong

Data proves otherwise.

[uponit7771]

17. So you think equities currently are correctly valued? REALLY ?!

[Hortensis]

12. Thanks for the picture, Prof. nt

[kentuck]

13. My bet is:

that, instead of giving out the subsidies to small businesses, Trump and Mnuchin are loaning it to their friends on Wall Street to purchase back their stocks and keep the stock market from going down.

That is what they did with the money....are doing with the money, in my opinion.

[OilemFirchen]

15. The current P/E ratio for the Dow Industrials is 21.49.

Last year at this time it was 18.22, and arguably overvalued given future GDP estimates.

What, other than a $2.3+ trillion Fed cash infusion would account for a higher valuation during the current economic climate?

[uponit7771]

20. +1, ... and I don't see where the 2.3 trillion is going other than pushing people out of bonds ...

... and into equities for yield.

The feds saying they're going to buy individual bonds was the wrong thing to do IMHO, that's straight up socialism

[Nevilledog]

19. This doesn't take away the fears I have.

I'm talking to our financial planner tomorrow.

[kurtcagle]

21. Longer term question

I have a heuristic (just observations on my part over the last sixty years) that an incoming president generally has little influence on the market for about twelve months after his oath of office. (e.g., Obama's real influence on the market was complete only by Jan 23rd, 2010 at around 10,800 for the DJIA (with it going up linearly from inaugural day 2009). As a heuristic it's reasonably useful as a gauge for how the market behaves absent the influence of the previous administration. I'm using the DJIA only because most non-financial people see it as being indicative of the broader market (S&P's better, but I don't have numbers easily memorized for that).

For Obama, this means the Obama rally saw an increase of 15,800 points (First anniversary for Trump was Dev 26, 2019, which meant that he "owned" the economy at 26,616). It was range bound within a window of about 1500 points either way for the next two years, breaking out only in Oct-Jan to reach a peak at 29551, then beginning to fall fairly steeply even before Covid really hit in February. The six-month-moving average for the DJIA today is just at 25,000, meaning that the DIA closed Friday almost exactly at the moving average, with no slope, which suggests that we're about to see an inflection point where the DJIA starts downwards again within the next week or so, ultimately hitting another inflection point around 21500 or so (based upon 6MMA) around Nov 1 before trending back upwards. That means that revisiting the March lows is certainly a possibility.

My personal suspicion is that we'll be around that level for a while. COVID-19's effects are going to take the wind out of the sales of the economy, and I think that another stimulus payment will be fought tooth and nail by the GOP unless they get a corresponding pound of flesh for their corporate donors, which I suspect Pelosi will block. My own belief is that the markets are still about 10% overvalued, given what I see with the virus, and so a DJIA 6MMA of 22,000 by November as not being unrealistic.

I'd be curious about your opinion about that?

[kurtcagle]

22. One other point

I find that using that 26,616 point at 1 yr of Trump admin makes it a lot easier to argue that Trump has done terrible in the market. At its peak, the DJIA was only up 11%, and at this point it's down about 6% from that starting point. At the same point in Obama's first term, the market was up by nearly 30%, and at no point after that "ownership" level did he have a net loss.