Much is being written in the press and the blogosphere about Dow 13,000. At this writing, it is possible that we'll get there before the close today.
Most, but not all of the stocks in the 30 stock index that comprise the Dow Jones Industrial Average are listed on the New York Stock Exchange. Microsoft (Nasdaq: MSFT) is a notable exception; it is traded on Nasdaq.
So what does it mean to have the Dow reach 13,000? Short answer: nothing.
Mathematically, it is no more significant than reaching 12,942 or any other number. Psychologically, I suppose there is slightly greater import. The psychology could lead to a modest euphoria that pushes the Dow up further, or it could create nervousness about "irrational exuberance" (borrowing a phrase from former Fed chief Alan Greenspan) that could push the market lower.
More significantly, let's put this into some perspective. On a dividends included basis, the total return for the Dow Jones Industrial Average for each of the following periods of time is shown in the table below (I'm actually using the return on the Diamond Trust (NYSE: DIA) which is the exchange traded fund that tracks the performance of the Dow almost perfectly). Reaching 13,000 adds less than 1% to each of the return figures below:
| Years | Total Return | Annualized Return |
| 1 | 16.1% | 16.1% |
| 3 | 31.0% | 9.4% |
| 5 | 44.0% | 7.6% |
| 9 | 68.3% | 6.0% |
The take-away I see in this data is that the medium term performance of the Dow, from three to nine years, lags its long term performance, suggesting the possibility of the short term continuing to rise faster than the long term average.
Please don't treat this as investment advice. There has also been much written in the last few years about a near-universal decline in yield and return overall. If stock prices fundamentally shifted to a higher level at some point in the 90's, it is possible that future returns may lag long term trends for some time. The Dow's U.S. concentration may also hurt returns at the margin (even though most Dow companies are globabl in nature, they are U.S. companies). One thing we know for sure, stock prices will fluctuate.
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This same rationale can be applied to simple stock trading. For example, take a stock that is at 8.38. My friend asks if he should sell at 9.00 or maybe when it gets to $10. Some people have the same psychological feelings for other numbers like $15, $20 or any other whole number or increment of 5. In reality, it doesn't make a difference. The only reason it might make a difference is for retail investors that are placing stop losses or have limit orders. It's possible that if a stock hits that whole number, it will surpass that number briefly. It's just another way to squeeze a few more pennies out of a trade.
Posted by: Steven Ting | April 24, 2007 3:42 PM | Permalink to Comment