The Dow's High: What Does It Mean?
By Ric Edelman
The following message was emailed to our clients on Tuesday, March 12, 2013.
- The Dow hits an all-time high
- The economy is good and getting better, even though the Dow's current pace can't continue
- We're rebalancing accounts where the opportunity to do so exists
- Stick to your plan and remain diversified
You're certainly aware of the fact that the Dow Jones Industrial Average set a new all-time high last Friday (March 8, 2013) of 14,397, and many celebrated. But what does this really mean for you and your portfolio?
First, a recap. The prior record of 14,198 was set on October 9, 2007. The stock market then began to decline, reaching its nadir exactly 18 months later, on March 9, 2009, at 6,547 — a loss of 53.88%. It took exactly four more years for the Dow to return to, and exceed, its prior high.
These figures hide the trauma experienced by, and still being experienced by, millions of Americans.
Today, investors are asking a simple question: Does the Dow's new record mean it's time to establish or increase holdings in stocks, or is it time to sell? This letter will answer that question for you.
First, let's not make too much of the number itself. The Dow is the result of an artificial, man-made formula. Consider this: The Dow does not include dividends in its formula. If it did, the Dow last Friday would not have been 14,397, but rather 27,600 according to S&P Dow Jones Indices.
Second, we must put the Dow in context, and there are several factors to consider. First, the Dow reflects the stock prices of (just) 30 of the biggest companies in America. This is a small sample of all U.S. companies, and hardly representative of the entire economy. For example, the NASDAQ 100 is still 55% off its all-time high, which was last set — ready for this? — 13 years ago, on March 10, 2000. (Nobody would be worried that the market is too high by looking at the NASDAQ 100.)
More importantly, the Dow reflects corporate stock prices. Those prices, in turn, reflect corporate profits, which have been strong for several years, and are widely expected to continue to grow — reflecting the continuing economic recovery.
Here are some reasons why investors are confident:
- More than 236,000 jobs were added in February, according to the U.S. Bureau of Labor Statistics, reducing the unemployment rate to 7.7%. Hiring is growing at a faster rate than economists have predicted.
- An estimated 1.3 million vehicles were repossessed in 2012, according to Manheim Consulting, the lowest level in 12 years, and down 32% from 2009.
- Americans are gaining confidence to borrow. Household debt increased at a 2.4% annual rate from October to December, according to the Federal Reserve, the biggest advance in almost five years.
- But consumers are not overdoing it, like they did in the prior decade. The average "young" household, meaning one led by someone under age 35, has total debt of less than $16,000, according to Pew Research Center. For this household category, that's the lowest debt level since 1983.
- The inventory of homes for sale reached an eight-year low in April, according to the National Association of Realtors. This shortage is causing prices to rise, helping ease the burden of millions of homeowners who have been struggling with underwater mortgages.
- Corporate America is on pace to return a record amount of cash to investors. According to S&P Dow Jones Indices, companies in the S&P 500 will pay $300 billion in dividends this year, topping last year's record of $282 billion. And Birinyi Associates says corporations announced plans just in the month of February to buy back $118 billion of their own shares — the largest monthly total since they started keeping records in 1985. This money gets put back into the pockets of investors, and thus into the economy.
All these statistics help explain why many investors are confident that corporate profits will continue to rise, and stock prices along with them.
But let's not get cocky. As of last Friday, the stock market has risen three consecutive weeks, and in eight of the last 10. It has also been up six consecutive days, and eight of the last nine. Year to date, the Dow is up 10%; if that pace continues for the rest of the year, we'll end with a gain on the Dow of 52%. This past week alone, the Dow rose 2.2%; that's an annual pace of 114%!
Clearly, this pace can't continue.
Instead, it is reasonable to expect that, at some point this year, prices will stagnate for a time. They might even decline before rising again. None of that is worrisome; it's a natural part of the behavior of the stock market. It's not a reason to buy or sell. Rather, such short-term volatility should be expected and ignored.
Which brings us to our advice for you.
Instead of focusing on the Dow's daily movements, pay attention to your goals. After all, your goals are the basis for the portfolio we created for you in the Edelman Managed Asset Program® (EMAP).
Next, maintain diversification. Now is not the time to go "all in" on stocks — or "all out." By maintaining a highly diversified portfolio, you reduce the risk that you'll "buy high" or "sell low." And diversification is exactly what EMAP provides you: Your portfolio features as many as 19 asset classes and market sectors, containing thousands of securities from as many as 40 nations around the globe. This reduces the risk that "something" might occur in any one investment — the Dow or otherwise.
In fact, you can guard against buying or selling the wrong thing at the wrong time by rebalancing — and that's exactly what we do for you. Through rebalancing, we sell assets that have grown and now comprise a larger portion of the portfolio than intended, and we buy assets that have proportionately fallen. The result is that we "sell high and buy low."
So if you've been wondering what we're doing during this current market movement, you'll be pleased to know that we have been rebalancing; in the past month, we have rebalanced about 10% of client portfolios. (For a variety of reasons, the others haven't needed rebalancing yet. Be assured, though, they will be rebalanced as soon as it's appropriate.)
Now is as good a time as any to consider adding to your portfolio if you can — no one ever went broke by adding to his/her savings and investments. As always, discuss your specific situation with your advisor.
Last Tuesday's The Wall Street Journal featured a headline proclaiming, "Market Rewarded Those Who Stuck It Out." If you were one of those who did, I want to congratulate you. Staying invested over the past five years, and maintaining confidence in our economy and our nation, took a substantial amount of fortitude and faith. While many others panicked, you persevered. It wasn't easy. Despite layoffs, a collapse in housing prices, political uncertainty and considerable fear-mongering by the media, you kept your cool and held on tight to your goals.
And indeed, you have been rewarded. If you were with us when the Dow hit its high in October 2007, and if you maintained your EMAP portfolio and allowed us to rebalance it (excluding withdrawals), your account value today is higher than it was back then — even though the Dow has only now returned to its prior level. You should be proud of your accomplishment. It was hard-fought and achieved by few. We are very proud of you and honored to be your advisor.
There are certain to be more developments as the year progresses, and we'll keep you informed. As always, contact us with any questions.
Chairman and CEO
P.S. There was one casualty resulting from the Dow's new high: My prediction that we'd see a 0.00 trading day by now failed to occur. The closest to a 0.00 close occurred on May 3, 2011, when the Dow closed up 0.15. Another close call was October 17, 2012, when the Dow hit 0.00 at 3:52pm — just eight minutes before the close. As Maxwell Smart often said, "Missed it by that much." I remain undaunted. A close at zero point zero zero will occur one day. I suppose I just can't say when!
Ric Edelman is Chairman and CEO of Edelman Financial Services, a Registered Investment Adviser, and CEO, President and a Director of The Edelman Financial Group. He is an Investment Adviser Representative who offers advisory services through EFS and a Registered Principal of (and offers securities through) Sanders Morris Harris Inc., an affiliated broker/dealer, member FINRA/SIPC.