In 1999, during the dot-com bubble, James Glassman and Kevin Hassett made a bold prediction that the Dow Jones Industrial Average (DJIA) index would hit 36,000 by 2002 or 2004. The DJIA hit 11,750 before crashing down. It was not until 2021 that the Dow eventually reached 36,000, 22 years after their prediction.
In fact, the DJIA experienced a lost decade, only surpassing the 11,000-point mark convincingly from 2011 onwards. In other words, the stock market was stagnant for 12 years.
Finally, the DJIA crossed another milestone last Friday when it closed above 40,000 for the first time.
History teaches us not to make predictions about how high the Dow will go. It will reach new heights, but it could also take a long time. So far, there haven’t been any bold public predictions, so the bull market hasn’t been jinxed yet.
The SPDR Dow Jones Industrial Average ETF (DIA) is an easy avenue for investors to buy a basket of stocks that mirrors the DJIA. The returns have been decent, averaging 8.5% per year since its inception in 1998.
However, the DJIA is not as popular as the S&P 500 index for tracking the US markets today. The most cited criticisms of the DJIA are that it only includes 30 stocks, while the S&P 500 includes 500. Some argue that 30 stocks are insufficient to represent the largest economy in the world.
Secondly, the DJIA appears to be an old construct, published in 1896 by Charles Dow, that hasn’t evolved well enough to capture the rise in technology. The DJIA only holds three of the Magnificent 7 stocks, and financials are the largest representation, with almost a quarter of the portfolio’s value.
Thirdly, the DJIA is unusual because it is not purely rule-based; a committee decides the components of the index.
Another peculiarity is that it is a price-weighted index rather than a market-weighted index. This means that stocks with higher share prices tend to have a higher weight in the index.
Despite these criticisms, the DIA has still managed to deliver an average annual return of 10.93% over the last 10 years, while the S&P 500 ETF (SPY) delivered 12.26% annually over the same period. The performance of the DIA is still commendable.
There is a variation of the DJIA known as the Dogs of the Dow. This strategy involves buying the 10 highest dividend-yielding stocks in the DJIA. There’s an ETF that tracks this strategy called the ALPS Sector Dividend Dogs ETF (SDOG). Unfortunately, SDOG didn’t perform well over the past year, as value-oriented strategies have been underperforming growth.
In terms of performance drivers for the DJIA, the main contributors were financial stocks. American Express, JPMorgan Chase, and Goldman Sachs were among the top five performing stocks in the index over the past year, each delivering returns of 43% or more.
The top-performing stock was Caterpillar, with a 66% gain, followed by Amazon, which saw a 59% increase.
On the other hand, consumer staples and discretionary sectors lagged. Nike’s stock price dropped 20% from a year ago. McDonald’s experienced an 8% loss, while Coca-Cola and Procter & Gamble had returns of less than 10%.
Overall, the stock market is bullish a gain, but there seems to be a sense of caution among investors. This is positive because it helps prevent overconfidence and hubris. A cautious investor mindset suggests that the stock market may still have room to grow.
