PDF Performance of Dow Jones Industrial Average: micro and macro ...

Performance of Dow Jones Industrial Average: micro and macro-level analysis

Luis Palacios Rabih Moussawi Denys Glushkov Bob Zarazowski

Motivation

Dow tends to hover around 1,000 and 10,000 thresholds for some time. Is it psychological anchoring of investors or there are fundamental explanations behind it?

DJIA

10,000

1,000

100

1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Overlaying 1966-1982 DJIA performance with 1997-2010

16,000

1,200

14,000 12,000 10,000

8,000 6,000 4,000 2,000

1,000 800

1997_2010 600

1962-1982 400 200

0

0

Micro approach: DJ constituents

? Pretty impressive coverage in terms of fraction of the entire market cap, ~20% Dow Jones Coverage as % of Total Equity Market Capitalization

35% 30% 25% 20% 15% 10%

5% 0%

DJ Coverage % of Market Cap

1960 1961 1962 1963 1964 1965 1967 1968 1969 1970 1971 1972 1974 1975 1976 1977 1978 1979 1981 1982 1983 1984 1985 1986 1988 1989 1990 1991 1992 1993 1995 1996 1997 1998 1999 2000 2002 2003 2004 2005 2006 2007 2009

Performance of DOW vs total stock market

? How good was DJ composition reflective of the overall US economy over time? DJIA returned less than the overall market, especially during 1977-1982 period.

$100 Buy and Hold DJIA vs Total Equity Market based on real returns incl. dividends (adjusted for inflation)

140

120

100

80

60

40

20

0

196601 196606 196611 196704 196709 196802 196807 196812 196905 196910 197003 197008 197101 197106 197111 197204 197209 197302 197307 197312 197405 197410 197503 197508 197601 197606 197611 197704 197709 197802 197807 197812 197905 197910 198003 198008 198101 198106 198111 198204 198209

DJIA with Dividends

Total Market Returns incl Dividends

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