Home / Education
  • Post Featured Image

    S&P vs. DOW

    You see this on the nightly news. It is discussed among “grown ups.” People toss these phrases around sounding sophisticated. But what does the S&P or the DOW really mean? Why does it matter? And how does it affect you?

    To start, let’s define these two: the S&P 500, often referred to simply as the S&P, is a market index listing 500 U.S. publicly traded companies. The Dow Jones Industrial Average, commonly referred to as the DOW, is a market index listing 30 of the largest U.S. publicly traded companies.

    These are oversimplified definitions so let’s dig a little deeper. First called the “Composite Index” in 1923, the name changed to the S&P 500 in 1957. This is a market capitalization weighted index where the index includes the total public market value of a company in its formula. In the S&P, the larger companies gain the largest percentage of the index. The result is that the S&P is considered a good gauge of large U.S. equities, though small and mid-sized companies are present in the index. The DOW, designed in 1896 to serve as a proxy for the broader U.S. economy, began as a purely industrial index. It is possibly the single most watched index in the world and is the second oldest U.S. index behind the Dow Jones Transportation Average. The DOW is a price weighted index; the prices of the 30 stocks in the DOW are added together then divided by the DOW divisor, resulting in the number that you see stated daily.

    Why does this matter? These two indices are highly publicized in the financial news. Many people see these gauges as benchmarks for the overall stock market. Yet, there is a problem in their methodology. The S&P is hyper sensitive to the price movement of its largest companies. For example, in October 2018 Seeking Alpha reported that the top 5 contributors to the S&P 500 resulted in 42.4% of the index’s gain for the year. In other words, 1% of the stocks in the index drove 42% of the return. If 5 stocks can drive this much of the index gain (or loss) this results in a very poor benchmark for the total U.S. stock market. The DOW has even worse measurables.

    Why does this really matter and how does this affect you?

    When you ask “How did the market do today,” what answer do you expect? If you hear that the S&P went up 1%, do you think “great, I made money.” Or if the S&P lost big, do you drop your head thinking “ugh, here we go again?” Yet, have you ever asked your advisor, “what is my portfolio’s proper benchmark?” or “What should I compare my results to?” This question is very important. We want you to have proper expectations for your returns and neither the S&P nor the DOW set proper expectations. In our opinion both are poor indices to invest in and both are poor benchmarks though they make for great talking points on news shows.

     Please contact us with any questions and feel free to ask your Sound Financial advisor how your model compares to these and what your model’s benchmark should be.

  • Post Featured Image

    June 2019 Market Update

    We have certainly entered the beginning of the summer doldrums, and the weather is already hot. The old saying of “sell in May and go away, come again on Labor Day” has yet to come to fruition. But we are seeing conflicting signals. The stock markets did sell off a little in the month of May, and the S&P 500 was down approximately 6.5%. Now, we have seen a bounce in June from those over-sold levels at the end of May.

    One June 1, we received a “risk off” signal from our math formulas. Remember, if you are in one of our advisory models, we are following a rules-based method designed to help you avoid large losses in your account. Therefore, we traded “risk off” moving from stocks to bonds for a portion of our models. However, our credit spread formula was our only risk off signal. This resulted in a relatively moderate risk off move,so we are still holding growth-oriented positions, even if they are traditionally more conservative than stocks. Of course, I am not speaking directly about any individual’s account, but our models as a whole.

    Overall, this was a conflicting signal similar to the one we received in April of 2018. This was conflicting because the stock market did not sell off drastically, and was recovering when our formula pointed to risk off. Couple this with the slowing economy, inverted yield curve, and a Federal Reserve that seems cornered into acting, and emotionally we did not mind this risk off move at all. So far this year, the markets have given us relatively good returns, better than expected. Yet, we still see long term problems for the economy and markets. This is exactly what we built our rules-based models for, to look at the data and keep our emotions out of the equation.

    The following is the market commentary from our investment team for the month of June. There are some valuable points to highlight. Feel free to read the entire report until your heart is content! Of course, your Sound advisor is happy to discuss this with you.

    We thank you for the trust you give us in managing your money.


RSS Feed
Powered by ID digital