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Explanation of the charts – Jan 2018 update

January 16, 2018

When the stock market is up, all of the indexes are up, and when down, they all are down. This is illustrated in the charts that shows the annual percentage changes. The only exceptions are years where the gains or losses were marginal. Last year was a good year so there are healthy gains all around. However some interesting, even if not fully explainable, results occurred last year.

  • The stogy DJIA increased more than the more representative S&P 500, and a little less than the high flying NASDAQ with the go-go stocks. The S&P includes all of the DJIA and most of the larger NASDAQ so I would guess the smaller companies dragged down the S&P index. This suggests 2017 was the year of the larger cap companies. This is further borne out by the smaller gains in the Russel 2000, although all the gains were impressive.
  • The PEs of the DJIA stayed the same as last year and the S&P dropped. Considering this was against a 25% and 20% price gain, I think these are pretty impressive. The yields dropped somewhat since the dividend payments did not keep up with the stock price growth, but the yields in the current interest environment are holding up very well.
  • The PEs over the past 10 years have increased, and it seems they increased beyond the traditional ranges. However the PEs are a reflection of a capitalization of earnings, and with the low interest rate environment over the last ten years, it is not unreasonable for the PEs to have increased. The percentage dividends for the DJIA have dropped but the dollars paid out have increased somewhat while the S&P 500 yields have remained pretty stable throughout the last ten year period. These indicate to me a low risk in the cash flow expectations from this index.
  • What I found interesting was the big jump in the Treasury Bill rate while the 10 year Treasury couldn’t be flatter. I gave my opinions on this in previous blogs so won’t go into this other than to state that this is pre-tax increase activity. It is too soon after the tax cuts that were “promised” to spur corporate capital spending, so we will have to wait and see what happens here. I suggest watching the bond market closely which will be a barometer on capital spending and the benefits from the tax cuts. Note that it is my contention that while the Fed has strong control over the short term rates, the longer term rates are determined by the market and the flat 10-year rate indicates that this demand hasn’t been evident in the last year and it is questionable if it would materialize going forward, but who knows?
  • The dollar got weaker against the Euro, Yen and Gold. However, the ten year growth of gold was much lower than any of the four stock indexes and also provided no cash flow during the last ten years. The 10 year change of the dollar against the Euro and Yen were 20% and 2% increases. Fluctuations between currencies are normal and these are not beyond an expected range.
  • The trend lines of the stock indexes are similar although to different degrees. When the market is up, everything is up and when down, everything is down. If you want to invest in the market, one strategy could be to choose a basket of the four indexes illustrated. One argument against this is that these do not include any foreign or emerging market funds. I content this is not that necessary since over 40% of the S&P 500 companies’ sales are out of the United States and likely there are similar numbers for the DJIA and NASDAQ, but likely not for the smaller companies in the Russell 2000. For now I would stick with the U.S. indexes.

The above are solely my opinions and I do not suggest acting on anything I said without further information, analysis and research on your part. Investing is a serious endeavor and requires the upmost thought, attention and input. Us the above as one person’s opinion.

One Comment leave one →
  1. 6hawthorne permalink
    January 16, 2018 7:26 am

    Hi Ed Chart are great when you want to see past records they could also help with seeing trends Bon

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