Mark Twain said, “The human race has one really effective weapon, and that is laughter.” I wholeheartedly agree. While this post is informative, I am aiming to make you laugh. I think it’s a good day for a good laugh.
These past few weeks here in the office, we have all been whiplashed and maybe even a little seasick by the parabolic movements of the stock market. In order to get some perspective, we’ve been listening to webinars from top economists and CIOs (Chief Investment Officers). The main message is, “Don’t panic.” Every time I hear those words it reminds me of the movie, Toy Story. Our family loves Disney movies. Almost daily, one of our family members will pull out a perfectly timed quote. I may snort-laugh when they do this. My family is funny. Here’s the don’t panic set up. Buzz and Woody have become stranded at Pizza Planet and are trying to make their way back to Andy’s house.
Buzz Lightyear: It’s no time to panic, Sheriff.
Woody: Now is a perfect time to panic!
I always say these with the appropriate voices and inflection in my head: Tim Allen as Buzz Lightyear and Tom Hanks as Woody. Toy Story was the first animated movie I laughed out loud at as an adult. It ushered in this new genre where parents could truly enjoy the movie along with their kids. And our laugher was real, not just faked amusement.
In honor of the current don’t panic message, I wanted to write about the stock market indices that the media report on daily.
A little background to this is that this concept of a stock market index was completely new to me two years ago. I was chatting with my husband, Jim (technically my boss at the office), and he was explaining the concept of the S&P 500 (Standard & Poor’s 500 index) and the Dow also known as DJIA or the Dow Jones Industrial Average—and not to be confused with the company, Dow Chemical. As he was telling me how many companies were included, I had a question.
Me: “So, what about all those penny stocks that I hear you’re never supposed to invest in? Aren’t those on the S&P?
Jim: “No. Only the largest 500 U.S. based companies are on that index. The index only includes part of what is traded each day.”
Me: “What! How can this be? Where is there a place where every company that is traded in the U.S. is tracked?”
Jim: “It’s not readily available to the public. There is no one place you can go to get that information.”
He was saying it like, “Duh? How did you not know this?”
After passing my Series 7 General Securities exam in November 2018, it’s a duh to me now, but I certainly understand how most folks don’t know the details. As of 2023, I am currently not registered.
I find the Dow index fascinating. It is the second oldest index. It was created by Wall Street Journal editor, Charles Dow, and his business associate and statistician, Edward Jones (no relation to Edward D. Jones, the founder of Edward Jones Investments). The industrial average was first calculated on May 26, 1896 and was originally comprised of heavy industrial companies. Think Bethlehem Steel, Union Pacific Railroad, F.W. Woolworth Company, Westinghouse Electric.
Currently there are multiple industries represented. Think Caterpillar, J.P. Morgan Chase, Disney, Apple, Netflix. The modern companies have little or nothing to do with traditional heavy industry. And here’s the kicker—there’s just 30 companies on the Dow (DJIA). This blew my mind when I first learned this. At least the S&P index has 500.
Here’s where it gets even more fascinating. Many companies on the Dow are also listed on the S&P 500. Some of them are listed on the NASDAQ index also. So, the value of their stock affects multiple indices at the same time. At the end of the day, the Dow and the S&P are not the best representation of the health of our economy. They merely give you a glimpse into how the stock of those companies are trading between customers. Just because Apple stock decreased, does it mean that during the last 30 days, Apple is suddenly a terrible company? No. Look at its balance sheet. It’s currently sitting on $200 billion in cash. The sudden decrease doesn’t indicate that no one is buying iPhones nor will they ever buy one again in the future. Yes, profits will be down for 2nd quarter of 2020. Corporations will aim to make up that loss later in the year.
Here’s another interesting observation: I think the networks choose to report mainly on the Dow. It’s the most dramatic when it makes movements. It’s reported at about 23,000 points, whereas the S&P 500 is about 2,700 points. How much can an index at 2,700 move? Not nearly as much, points-wise, as one at 23,000.
Speaking of dramatic movements, Jim was a journalism major in college. Yes, not a finance major. Twenty years ago, when he graduated from Gonzaga University in Spokane, he came to the realization that the media’s job was not to tell the truth. It was to sell advertising. The news organizations that have the most viewership and the most sensational headlines can charge the most for ad space. The focus became filling the media coffers rather than reporting facts and informing the public. Today, this reality is evident and it’s exponentially more challenging to ignore.
Jim originally chose journalism because he wanted to expose and tell the truth. Once he realized this wasn’t the case, it was too expensive to change majors 2 years into a 4-year degree program. He finished the courses and graduated with his BA in Journalism. He then became an advisor with American Express Advisors straight out of college.
So, what should we all be doing right now? If I take a play out of Jim Cramer of Mad Money’s playbook, here’s our list of hot tips.
Hot Tip #1: Stop watching the financial entertainment networks. Unless it completely entertains you, then do that.
Hot Tip #2: Stop checking your account balances if it’s stealing your joy.
Hot Tip #3: Remember your timeline for withdrawing your money. Do you need it today or do you still have some runway left? If you have runway, stick to your plan. If you don’t have a plan, call us.
Hot Tip #4: Don’t panic and sell low. Remember Buzz Lightyear's advice. If you sell now, you will permanently lock in any losses. Unless all the money, in all your accounts, is invested exactly like one of the market indices, your account will not go up and down in the same proportions. For example, if you are a moderate investor and your account has about half the risk of the Dow and the S&P 500 indices, the your account value will generally rise or fall about half of what the indexes do.
Hot Tip #5: If you have a mortgage, take a look at refinancing if your interest rate is higher than 4.25%. Pay careful attention to fees to see if it makes financial sense. Credit may become tight in the near future depending on how our legislators work together to bring us out of this crisis. Real interest rates just hit 0%. If you're interested in what this might mean, read this article by Ray Dalio on LinkedIn. We also reference his video on how the economy works in this May 2019 blog post. You can also see the video on his site.
Lastly, and completely unrelated–because I think we all could use a little laugh today—here is one of my favorite cat videos. My youngest LOVES cats. My husband even indulges it. He takes him to the animal shelter so he can visit them. He reads to them. Pets them. Loves them. And then I tell him to come home because I can’t battle any more pet hair in the house. We currently have 2 pet-hair-producing cats and 1 high-maintenance-pet-hair-producing dog. I admit to being a pet-hair-hating but dog-and-cat-loving owner.
Here it is: If I fits, I sits
* For more in-depth info on the Dow, like how it is price-weighted (meaning that the index moves in-line with the price changes of its components on a point basis adjusted by a divisor) see this Investopedia article: https://www.investopedia.com/ask/answers/what-are-points-on-the-dow/
** All images and references belong to their respective copyright holders.
The views expressed are those of the author as of the date noted, are subject to change based on market and other various conditions.