By Francisco Rodriguez-Castro, President & CEO of Birling Capital Advisors LLC, published on January 25, 2017
This week the Dow hit the elusive 20,000 mark on January 25, 2017, this after coming within less than ½ of 1 % earlier this month, As the Dow Jones Industrial Average crossed this record level. This milestone is being hyped, celebrated, advertised, honored among other things by specialized media outlets such as Bloomberg and more mainstream media like CNN or NBC. Is there longer-term significance? Should investors really care? The answer is both: Yes, and No.
Without considering the importance level, you place on the Dow 20,000, there are seven things every investor should know about Dow:
- The Dow is more of an emotional constant.most traders love the big and impressive numbers preferably increasing and so do most investors.
- The Dow Jones Industrial Average is not ideal when looking for analytical content. – as the index covers a very narrow set of stocks and therefore is lacking in representation.
- Dow is heavily mentioned when it comes to headline information about stock market performance- Both you should know that it is not the only U.S. index flirting with record levels. The Standard & Poor’s 500 and Nasdaq are at or near their all-time highs and both are better representations of the market.
- The economy is better, and expectations are higher- with the unemployment rate at 4.7% with more than 13 million new jobs in the markets and the prognosis that this economic rally will continue.
- The Dow in perspective is 20,000 enough? Due to the power of compound interest, 100-point – or even 1,000-point – swings in the Dow don’t mean what they used to ink about it this way: The Dow first crossed the 1,000 mark in November 1972. It would take more than 14 years for the Dow to gain the next 1,000 points, which it accomplished when it first broke 2,000 in 1987. In contrast, the Dow hit 19,000 on Nov. 22 and is approaching 20,000 less than a month later.
- A few minor changes in the index’s constituents make a huge difference.Further adding to the arbitrary nature of the Dow, the index’s 30 constituents aren’t set in stone like many people might think.
- We Shouldn’t pursue the S&P 500 as a Diversification strategy- believe it’s time to rethink how to diversify, as bond yields rise and U.S. Treasuries’ inverse relationship with equities weakens. So DOIA is too narrow to be viewed as t diversification strategy. It is more effective to seek a diverse basket of investments to pursue a diversified strategy.
We should have little doubt about the signaling outcomes. Already, The Dow 20,000 has become the front-page news of all media. Most investors hope that this milestone will act as a stepping stone seeking the diverse participation of the general investor base most notably millennials in particular since they are the focus of growth in the new investment world. After all, an increased investor bases are the contributors to a fundamentally healthy and less volatile market. The problem is that it may take a lot more than headlines and social media likes for this to happen.
Moving on to Puerto Rico we see that most Puerto Rico securities, including sales-tax debt, have gained in value since enactment of the PROMESA law. Senior Cofina capital-appreciation bonds maturing in 2056 — which don’t receive interest payments until the final maturity — last traded Friday at an average price of about 7.8 cents on the dollar, to yield 6.5 percent, according to data compiled by Bloomberg. The Cofina and GO’s have been fighting over the sources of income and how they would survive these filings towards a filing a lawsuit by a group of hedge funds that hold general obligations. Those investors asked a court to stop Puerto Rico from allocating sales-tax revenue to repay Cofina debt. A portion of the island’s sales-tax receipts is dedicated to paying Cofina bonds. General-obligation investors believe the revenue should go first to repayment of their securities because the commonwealth’s constitution stipulates that such debt should be paid before other expenses.
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