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

[Pages:22]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

1,800

1,600

S&P appears to be more reflective of the overall market performance

Performance of Dow Jones versus Total Market Index vs SP500, levels

(Excluding Dividends reinvestment and inflation adjustment) 1966-1982

1,400 120

1,200 100

1,000 80

800

60 600

40 400

200

0

Dow Jones Index Level

Total Market Index

196601 196605 196609 196701 196705 196709 196801 196805 196809 196901 196905 196909 197001 197005 197009 197101 197105 197109 197201 197205 197209 197301 197305 197309 197401 197405 197409 197501 197505 197509 197601 197605 197609 197701 197705 197709 197801 197805 197809 197901 197905 197909 198001 198005 198009 198101 198105 198109 198201 198205 198209

S&P 500

160

140

20

0

Much more aligned later due to better representation of key industries of the economy

Performance of Dow Jones versus Total Market Index

(Excluding Dividends reinvestment) 1982-1999

12,000

1,400

10,000 8,000 6,000 4,000 2,000

1,200 1,000 800 600 400 200

0

0

198211 198304 198309 198402 198407 198412 198505 198510 198603 198608 198701 198706 198711 198804 198809 198902 198907 198912 199005 199010 199103 199108 199201 199206 199211 199304 199309 199402 199407 199412 199505 199510 199603 199608 199701 199706 199711 199804 199809 199902

Dow Jones Index Level

Total Market Index

S&P 500

Dow as better gauge of overall market performance in the most recent period

Performance of Dow Jones versus Total Market Index

(Excluding Dividends reinvestment) 1999-2009

16,000

1,800

14,000 12,000 10,000

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

1,600 1,400 1,200 1,000 800 600 400 200

0

0

199904 199907 199910 200001 200004 200007 200010 200101 200104 200107 200110 200201 200204 200207 200210 200301 200304 200307 200310 200401 200404 200407 200410 200501 200504 200507 200510 200601 200604 200607 200610 200701 200704 200707 200710 200801 200804 200807 200810 200901 200904 200907 200910

Dow Jones Index Level

Total Market Index

S&P 500

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