The much-heralded 20,000 milestone reached by the Dow Jones Industrial Average (DJIA) garnered major media attention, but that’s due more to the fame of the index than its importance as a bellwether of the economy.
After all, the DJIA consists of only 30 names, making it far less diversified than the S&P 500 Index. The Dow also utilizes a price-weighting method that places an arbitrary importance on individual stocks.
What the Dow represents
• The Dow has a significant bias toward the financials and industrials sectors, and little exposure to the so-called "bond proxies," including telecommunications, utilities, consumer staples, and REITs stocks.
• The index also has an overweight to legacy technology companies, stocks like IBM and Cisco, historically focused on desktop computing. At the same time, the Dow does not include large internet service and social media tech companies like Google and Facebook.
Other major milestones
• The Dow hit the 10,000 milestone on March 29, 1999, but plummeted to 7114 during the financial crisis.
• In the early part of the recovery from the Great Recession, the Dow crossed the 15,000 mark on May 7, 2013. The Dow reached 19,000 on November 22, 2016.
The Dow has rivals
• Standard & Poor’s launched its first “Composite Index” in 1923, but the S&P 500 Index as we know it today was launched in 1957. The S&P 500 today represents $2.2 trillion of stock market capitalization, and there is more than $7.8 trillion in assets benchmarked to the index.
• Among other important indexes, the Nasdaq has set several record highs since the 2016 U.S. election. There are no small-cap companies in the Dow. The Russell 2000 Index — as a benchmark for small caps not found in the Dow — has hit 15 record highs since the election.
Source: Putnam.
305058
For informational purposes only. Not an investment recommendation.
This material is provided for limited purposes. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Putnam product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice. The opinions expressed in this article represent the current, good-faith views of the author(s) at the time of publication. The views are provided for informational purposes only and are subject to change. This material does not take into account any investor’s particular investment objectives, strategies, tax status, or investment horizon. Investors should consult a financial advisor for advice suited to their individual financial needs. Putnam Investments cannot guarantee the accuracy or completeness of any statements or data contained in the article. Predictions, opinions, and other information contained in this article are subject to change. Any forward-looking statements speak only as of the date they are made, and Putnam assumes no duty to update them. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties. Actual results could differ materially from those anticipated. Past performance is not a guarantee of future results. As with any investment, there is a potential for profit as well as the possibility of loss.
Diversification does not guarantee a profit or ensure against loss. It is possible to lose money in a diversified portfolio.
Consider these risks before investing: International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Investments in small and/or midsize companies increase the risk of greater price fluctuations. Bond investments are subject to interest-rate risk, which means the prices of the fund’s bond investments are likely to fall if interest rates rise. Bond investments also are subject to credit risk, which is the risk that the issuer of the bond may default on payment of interest or principal. Interest-rate risk is generally greater for longer-term bonds, and credit risk is generally greater for below-investment-grade bonds, which may be considered speculative. Unlike bonds, funds that invest in bonds have ongoing fees and expenses. Lower-rated bonds may offer higher yields in return for more risk. Funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. Commodities involve the risks of changes in market, political, regulatory, and natural conditions. You can lose money by investing in a mutual fund.
Putnam Retail Management.