Friday, September 2, 2011

Ignore the DOW!

Almost without exception, every newscast includes a report on the DOW, which is shorthand for the Dow-Jones Industrial Average.  It is, supposedly, a measure of the performance of the stock market.  It’s not.  It’s a number that far too many people use to guide their lives, and far worse, their attitudes.  We need to ignore it.

Let’s begin with what the DOW actually is.  There are actually several Dow Jones indexes, but the one we hear about most is the Industrial Average, which is a misnomer.  Originally it was exactly that…an average of industrial stocks, but now it is comprised of many non-industrial companies.  There are 30 of them, spread across most business sectors, from banking and general retail to pharmaceuticals, heavy industry, energy, food and conglomerates.

They have been selected to represent those sectors as a whole, based upon somebody’s notion that what is true for McDonalds is typical for all fast-food companies, and what is true for Bank of America is typical for all banks.  It is also an average, so it can rise or fall based upon something in a single industry, and with both Chevron and ExxonMobil as members, the volatile energy business can easily wag the dog...or DOW.

In any case, the index goes up and down regularly, and we hear terms like technical correction or panic selling pretty regularly too.  Those terms have little meaning in the day to day lives of each of us, yet more and more we focus upon them.  People begin a conversation with “The stock market went down again today.”  No, it didn’t.  The index of 30 companies might have, the but market could have done anything.

Unfortunately, while the DOW doesn't directly affect most of us, when we continually hear bad news our attitudes are affected.  This week a new survey came out reporting that consumer confidence is down.  Why?  What changed that caused that?

Maybe you went to the store and discovered the prices for that necessary back-to-school stuff was higher than you expected.  Maybe you just got a lay-off notice.  Maybe you received a foreclosure notice from the bank.  Maybe lots of things.  But…maybe…you just keep hearing that the DOW went down.

The truly stupid part of all of this is that we somehow assume that the DOW means something.  It doesn’t, at least not on a day to day basis, and there are several reasons.

The first reason is that most trading is done by computers.  The big brokerage houses all use computerized trading programs that prowl the market for any slight change.  Given their programs they can even create a trend simply by selling stocks that the program believes are vulnerable.  A while back the whole market had a major hiccop and dropped like a rock.  Well, the DOW did.  Why?  When the dust settled it was finally determined that a computer program started the ball rolling and all the rest of the computers jumped in to join the fun.  It was “a technical glitch.”

In other words, a single computer believed the sky was falling, and once the rest of the computers were convinced, the sky did fall.  Sorta.

That gets to the next problem.  Contrary to what “the market people” will tell you, the stock market operates upon emotion.  An investor sees something, gets excited, and decides to buy or sell based upon that twitch.  It’s like the little Dutch boy pulled his finger out of the dyke.  Steve Jobs health controls Apple stock, even though they sold more iProducts the day after he resigned than they did on the day before he resigned.

Another element that controls the market is activities around the world.  The market is nervous about Greek debt.  Why?  Well, it’s…it’s…because…because…the Greek economy might fail.  Okay, and exactly how does that directly affect us?  Well…some banks might have invested in Greek stocks or bonds, and they might not get paid.

Okay, for a bank that might make sense, so we could look at Bank of America, which seems to be a real mess these days, and see if they’re actually vulnerable.  JPMorgan Chase might be exposed too, but none of the other members of the 30 seem to be directly affected.

It’s possible Boeing might not sell some planes, or maybe Caterpillar had a big sale pending, but it seems unlikely that Microsoft or IBM would be directly affected, and remember…the market moved on the fear that the Greeks might default.  Thus far, they haven’t.  So, the DOW reflects fears and twitches far more than reality.

In short, as a measure of how things are doing, the DOW pretty much sucks.  It’s an average, and that automatically means some things are disguised.

And while I’m on the subject, let me make one other observation.  About quarterly earnings.

Every publicly-held company reports quarterly earnings.  It’s one measure of how the company is doing.  It’s not a really good measure, for lots of reasons, but it is one measure.  The “market analysts” predict what the earnings will be, and then the company reports the real number.

Option 1

The analysts predicted 27 cents per share, and the real number is 26.  THE SKY IS FALLING!  The stock immediately tanks because the company didn’t perform up to the analysts’ expectations.

Option 2

The analysts predicted 27 cents per share, and the real number is 29.  Oh.  No big deal.  So what?

The funny part is that companies seldom get credit for doing better than the prediction, but it’s the end of the world if they do less.  However, maybe the company did just fine, and the analysts were off.  It doesn’t matter.  The market would prefer to believe the analysts (astrologers) were more right.

In short, forget about the DOW.  Ignore the DOW.  Don’t base your attitudes or ideas upon the DOW.  In your day to day life, it means nothing

1 comment:

leah said...

Hmm. Well, since none of those things is depositing anything into my poor empty bank account, I usually don't get affected by the so-called ups and downs of the stock market. But don't allow me to keep you from explaining it to dolts like me. :)