The Dow Closed Above 40,000. Does it Matter?
The Dow Jones Industrial Averages (DJIA) closed about 40,000 for the first time on Friday. This was the first time the blue-chip index closed above that value in its nearly 140-year history. It did go above that level during intraday trading on Thursday but did not stay there.
The Index is the second oldest and is still widely followed as an indicator of the market. However, in reality, it is a narrow representation that focuses on 30 well-known mega- and large-cap stocks. That said, the Dow comprises some of the most widely owned equities with a total market capitalization exceeding $14 trillion. The total U.S. market capitalization is over $50 trillion. Thus, it is a relatively large fraction of the market. Also, the companies pay dividends, except for Amazon.
The Dow 30 is price-weighted, which causes some inconsistencies due to company actions like stock splits or dividend payments. Changes to the Index also cause discontinuities. The Dow Divisor was introduced to address this issue.
The DJIA is up over 6% year-to-date, which is a decent performance. It is moving higher because of economic optimism and anticipation of lower inflation. The April Consumer Price Index (CPI) came in below expectations.
The Dow is easy to follow and understand despite its academic flaws relative to market-weighted indexes. The DJIA is not typically used as a benchmark for exchange-traded funds (ETFs) or passive index funds. However, if it goes up, some of the most well-known corporations in the United States will probably be doing well. Because each represents a sector or industry, it is a snapshot of the U.S. economy. Moreover, the 40,000 value represents a barrier to investor optimism and momentum. Crossing it removed the barrier. The index also responds to news about inflation.
So, the answer is yes, it does matter.
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Stock Market This Week
Stock Market This Week – 05/18/24
Data from Stock Rover* showed the stock market had a mixed week. The Dow Jones Industrial Average (DJIA) had the best return, crossing the 40,000 mark. It was followed by the S&P 500 Index, the Russell 2000, and the Nasdaq Composite.
Eight of the 11 sectors had positive returns this week. The Energy, Basic Materials, and Financial Services sectors were top performers. However, the Real Estate, Technology, and Consumer Defensive sectors were the worst performers. Sentiment has seemingly turned against Technology.
Oil prices rose to ~$79.50. The VIX declined ~4.5% to roughly 12, well below its long-term average. Risk perceptions rose until the United States passed the aid bills for Ukraine, Israel, and Taiwan. Gold ended the week at ~$2,420 per ounce.
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Despite a few bad weeks, the markets continue to move upward because of the American economy’s strength and the bull market’s continuation. Moreover, geopolitical situations have seemingly stabilized. The S&P 500 leads the way, followed by the Nasdaq, the DJIA, and the Russell 2000. Ten of the 11 sectors have positive returns. The top performers in 2024 have been Utilities, Communication Services, and Energy, while the Healthcare, Consumer Cyclical, and Real Estate sectors are trailing.
The dividend growth investing strategy started the year down but has recovered. Larger market capitalization stocks are performing better than smaller ones. The table below shows their performance by category. Dividends and passive income streams continue to grow.
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Stock Market Valuation This Week
The S&P 500 Index trades at a price-to-earnings ratio of 27.56X, and the Schiller P/E Ratio is about 34.70X. These multiples are based on trailing twelve months (TTM) earnings.
The long-term means of these two ratios are approximately 16X and 17X, respectively.
Despite the recent correction, bear market, and rebound, the market is still overvalued. Based on historical data, earnings multiples of more than 30X are overvalued.
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.
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