What Happened: Amazon to enter the Dow Jones Industrial Average

What Does it Mean? As the Dow approaches 40,000, it looks as if a new name may help propel this index higher. Amazon will enter the Dow replacing Walgreens. The move is significant in our opinion as yet another lesson in just how markets tend to work over time.

Why Do We Care? In 1896 Charles Dow, the founder of the Wall Street Journal wanted to create an index to track America’s economic progress. The Dow Jones Industrial Average was born with 12 companies representing American industrial progress with names such as Allied Chemical, American Tobacco, Chrysler, General Motors, Standard Oil, and Woolworth. Unlike the S&P 500 which is a market cap weighted index, the Dow has always been calculated based on a price weighting which means the higher the priced stock of a Dow component the more important its movement.

Whenever I’m asked my view of the market I always like to say “In the long term, we’re going higher, much higher.” To which most people tend to scratch their heads. What they don’t understand is that I’m referring to the nature by which the ‘Market’ is structured. Over time, companies are added and deleted from the Dow, similar to the S&P.

Have you ever wondered why the Dow Jones average is hitting levels it has never seen in its lifetime yet not a single company from the original Dow remains in the Dow today? The simple reason is that over time laggards are removed and newer companies are added. While on one hand Charles Dow may cringe at the lack of industrial companies in his index today, as names such as Salesforce, IBM, Microsoft and Goldman Sachs now make up the Dow, I am certain he would be very pleased that this index has evolved just as American industry has evolved.

In 2017, Warren Buffet discussed Dow 1,000,000 (No, not a typo) I remember reading this and thinking ‘Has he lost his mind?’ Until I ran the math. Ironically, in order to reach his projection, over 100 years, the Dow would have to average 3.9%. While my investment timeline is shorter than 100 years, it is yet another example of the futile attempt to call American industry dead.

I continue to believe that when the Dow crosses 40,000 folks on the sideline will be forced to take notice. When we cross 50,000 they may really start to feel uncomfortable.

 

What Happened: Nvidia reports another blockbuster quarter, topping expectations and propelling the S&P to new highs.

What Does it Mean? For over a year now, investors have been wondering just how ‘real’ this Artificial intelligence (AI) movement is. When Nvidia first reported an earnings blowout, during the early part of 2023, many skeptics were curious if the optimistic outlook had more to do with duplicate orders or maybe the bump in revenue and earnings was just an anomaly. After multiple quarters of robust growth and incredible profitability, it’s safe to say the AI movement is here to stay.

Why Do We Care? Similar to the Dow, the S&P overall movement is based on the progress of its components. Unlike the price-weighted Dow, the S&P is market cap weighted which means the larger the company the more influence it has on the index itself. While not many investors may have predicted the Nvidia AI boom, if you own a passive S&P index fund or ETF (such as the core holding in our passive allocation models) Nvidia now holds the #3 spot in this index and over a 6% weighting. While stock picking may be a fun hobby, it is once again a reminder of just how impactful a passive strategy is when it comes to owning the winning stocks in any bull market.

When you hear someone talking about the Nvidia advance, or for that matter any of the massive ‘Mag 7’ as they’re affectionately known, smile knowing you’ve been in them all along!

Logan & Quint continue to be called upon as thought leaders in our industry. Both found themselves on the local and national stage this week.

 

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