August 10, 2020
A long time ago when I decided to enter the world of finance and economics, I thought to myself it was the perfect area for me to work because there was not a ton of “gray matter.” The concepts of economics are relatively straightforward and it’s hard to argue with numbers are numbers and math has right or wrong answers, period. I am the type of person who likes structure and definition, but I am also an intuitive problem solver and solution orientated person, and that is where my creativity can thrive in the financial planning services I do for my clients. People are unique and so are their circumstances. Like snowfall, we can have days where the accumulation is the same amount, but all the snowflakes are designed differently.
So, in a worldwide economic situation like the one we find ourselves in, you can probably see me doing a lot of head scratching and shaking my head because, to me, not much makes sense in the world right now. Like many people, I have felt the constrains of the coronavirus. I do not like being unable to see family, friends, or my clients. I am a very social person. Being social is a large part of what can drive our economy and uncertainty remains prevalent. We are missing the normal experiences of eating out at restaurants, travelling, and watching sports. Unemployment is the highest level it has been in years and we are experiencing a decline in the growth of our economy. With the restrictions in place and the analytics we are hearing about you would think that we are in a full-on slowdown, but the financial markets have done exactly the opposite.
The history of the Dow is quite interesting, and speculation exists today if the Dow Theory is in play given today’s financial markets. The Dow Theory was developed by Charles H. Dow in the 1800’s. Dow was a journalist and the founder of The Wall Street Journal where he also served as the first editor of the publication. He co-founded Dow Jones and Company, which is widely recognized to this day. His theory was derived after his death in 1902 from a series of 255 editorials he wrote for the paper. There are several components that go into this theory, but the key takeaway is that Dow believed the stock market as a whole was a reliable measure of overall business conditions in the economy and through analysis one could accurately gauge and identify market trends. The intricate and expanded details of this theory and the six tenets that comprise it can be read here. Did I mention how much of a history nerd I am?
The Dow Jones Industrial Average (DJIA) is the most recognized index we track in the financial markets. The DJIA consists of 30 large cap stocks that represent the largest companies in the world. Many would argue that this index is not an accurate representation of the markets since it is limited to a group of 30. A broader based index followed is the Standard & Poor’s 500, which represents over 500 companies among many different sectors. Last week the Dow Jones Transportation Index broke its previous highs from June. If we were to follow the Dow Theory, we would expect that since the transportation index reached a new high that a broader index, such as the DJIA, would likely follow the trend. An uptick in performance has occurred since the low levels registered during the first quarter of this year.
This brings up the hot topic question – where are we at and why are the markets doing so well if the economy is not good? There has been a lot of talk about the type of recovery we are experiencing in this country. Many economists would argue that we are in a V-shaped recovery, which is one defined as a sharp rise back to a previous economic peak after experiencing a significant and rapid decline. Another group of analysts would say that we are in the middle of a K-shaped recovery. This type of recovery would illustrate that a crisis, such as the coronavirus pandemic, will widen the gap that already exists between the richer versus the poorer, and that under these circumstances investors would be under the impression that conditions are better than they actually are. I think it’s safe to say that this year is a bit of a mess, and if Dow’s concepts are accurate, we would think that the gains we’ve had would be spread equitably across the economy but this is simply not the case. Is this Dow Theory, but with a twist?
So, where does this leave us as investors and what do we do? We continue to focus on value and peek through the curtains as to what parts of the economy will benefit from this terrible situation we have all been facing. There is a lot of value in the markets right now and depending on what we see in the remaining earnings reports through this year will determine how that value is realized. There is a solid foundation in our markets with high quality companies that will weather this storm and grow through it while increasing dividends to shareholders. There are also names we will see that are going to be in the next wave of the latest and greatest movers and shakers that emerge from the benefits of capitalizing on disruptive technologies. Many emerging and smaller companies are having an excellent year so far, but as with everything related to the markets, nothing is ever guaranteed.
As I’ve said many times before and what I continue to share with those I work with is that the key to a successful, long-term investment program is diversification with a level of risk you are comfortable with. Events happen quickly and emotions are running high, so having a balance uniquely suited to you is the most prudent course of action you can take. Keep the communications lines open with those who provide you with guidance and insight on your planning needs and investment strategies. The world is overwhelming enough right now, and to add unnecessary stress in trying to interpret what happens in the economy daily is not a recommendation I would make to anyone these days. My best thoughts would be to sit back, trust your professionals, and maybe Netflix and chill like the snowflakes we all are.
Iris Buczkowski is the founder of Birch Wealth Management (birchwealth.com). Original content provided by Iris is for educational purposes only and should not be construed as investment advice.