Should you buy, sell or re-balance as the Dow keeps breaking records? (Hello 40K!) History gives us a guide.

In 1924, the Dow Jones Industrial average hovered around 90 much of the year.   That's not a typo.  Fast forward 100 years and it broke 40,000 a few weeks ago.    It's a number that moves markets, captures worldwide headlines and can even shape political campaigns.   And yet, the Dow is only comprised of 30 companies.  30 LARGE companies but 30 nonetheless.   Keeler and Nadler's Andy Keeler and Mark Beaver do a deep dive on the history and performance of the greater stock market over the last century.   Woolworth and American Sugar are long gone on the Dow 30 and no one would have guessed a century ago, a piece of fruit (Apple) and a soda (Coca-Cola) would be there today.    As Andy and Mark know well and as you're about to hear, what has weathered the up's and down's is this axiom - it's not about timing the market, it's time in the market.

The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations.

It is only intended to provide education about finance, tax, retirement and related planning topics. To determine which investments or strategies may be appropriate for you, consult your financial, tax or legal advisor prior to implementing. Any past performance discussed during this program is no guarantee of future results.

Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.

Keeler & Nadler Family Wealth is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Keeler & Nadler Family Wealth and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Keeler & Nadler Family Wealth unless a client service agreement is in place.

Transcript

Andy Keeler Host

If you follow the news, you know the Dow Jones Industrial Average recently broke through a historic milestone 40,000. It's a big number, but what does it mean and what does the future look like for the equity markets? It's an election year, which has some investors on edge. So today, for episode three of Financial Opportunities Uncovered, we welcome one of our own, Mark Beaver, to help us understand this event and look ahead into the future. Mark is a certified financial planner here at Keeler and Nadler and he leads our investment committee. So, Mark, before we get into the numbers and nerd out a bit, why don't you tell our listeners why you have such a deep interest in investments? 

Mark Beaver Co-host

Yeah, it's a good question. I don't know exactly where that stemmed from. I know in college. I was in college through the great financial crisis, so there's a lot of interesting things happening in the stock market and that definitely grabbed my attention and drove me to learn more about what was going on. 

But I also think back to high school math class and I remember them talking about exponential growth, compound growth rates, and being intrigued by that concept, sort of that. They told where you could either take a million dollars right now or they would give you one penny, compounded at 100%, for a month. Which one would you pick? And on the surface, it sounds like I'll take the million dollars. I don't remember the exact math here, but I think the penny turns into like $100 million, you know, after you keep doubling it for a month. So that idea that your money could make more money for yourself was very interesting to me. I remember we did a stock class project game, if you will, and I'm sure none of us had any clue what we were doing, probably just picking whatever company we thought was cool at the time. But that idea was just really interesting and I remember being interested to learn more. 

Andy Keeler Host

So, one penny in one month, $100 million. That's significant. 

Mark Beaver Co-host

Yeah, don't quote me on that number, I just know it's a huge number. 

Andy Keeler Host

It was more than a million. 

Mark Beaver Co-host

It's a lot more than a million. So yeah, it just shows the power of compounding. 

Andy Keeler Host

So, what exactly is the Dow Jones Industrial Average? 

Mark Beaver Co-host

The Dow is a stock market index, and an index is used as a way to represent the stock market. So, it's a way to compare, maybe, your performance against the overall stock market or even just know what's happening in the stock market. Is the stock market down or up? What is it doing? It was invented over 100 years ago, back in 1896, by Charles Dow when he was working for the Wall Street Journal. And at the time you really had no way of knowing what the stock market was doing unless you just checked the newspaper every day and did it for yourself. But there wasn't a way to say, oh, the market's up today, the market's down, unless you really looked to see what was going on. So, it gave people a sense of what's going on in the market and comparing themselves against that, or even just the idea that you could say the stock market is averaged X percent a year. You couldn't really do that easily until that happened. 

Andy Keeler Host

And what did it look like back then. 

Mark Beaver Co-host

Very different, as you can imagine, in 1896. It started with just 11 companies at the time. They eventually expanded it to 30 companies in 1928. But those 30 companies were a lot different than right now. Some of those companies at the time included Sears, Roebuck, Standard Oil, Westinghouse, Woolworth and American Sugar. So, a little different than today. 

Andy Keeler Host

Just a bit. So, what are say some of the top five companies in the Dow right now?  

Mark Beaver Co-host

United Health, Goldman Sachs, Microsoft, Caterpillar and Home Depot. 

Andy Keeler Host

Home Depot I was there earlier today. Microsoft, I use a Microsoft Surface. Caterpillar. I guess when you look around at all the growth we have in Dublin and around the country, I guess I can see that. Very interesting, though big changes. US Steel, I don't even think they're still in business. Standard Oil, I think, was purchased by BP. Maybe Sears I can't remember when the last time was, I was in a Sears, so anyhow, how does that compare to the Dow in terms of how each company contributes to the returns? Again, I don't get into the weeds too far on this kind of stuff, but the way I understand it, there's a weighting of companies in the Dow that differs from, say, the S&P 500. How does that work with the Dow? 

Mark Beaver Co-host

Yeah, so originally Charles Dow just picked 11 companies to represent the market and now there's a committee that selects which 30 companies are in that index to represent the broader market. So, it is a little subjective to that committee and how they're selecting which companies are in, which companies are out. The companies then are weighted based on their stock price, so the company with the highest share price gets the highest weighting in the index. And that's a little bit where the challenge, I think, with the Dow comes, and so I for one actually don't think it's the greatest as a benchmark tool, because one it's only 30 companies and then two. There is that subjectivity to that committee picking who's in or who's out, and then the stock price weighting part doesn't really make sense to me, because the share price of a company doesn't necessarily tell you the value of that company. You could have two companies that are a hundred dollars a share and one could be a trillion dollar company and one could be $10 million company. 

Andy Keeler Host

Because one has more shares outstanding than the other? 

Mark Beaver Co-host

Exactly so another way of looking at that would be called market capitalization, which is just like you were saying. It's the share price of the company multiplied by how many shares they have, and that tells you, if you bought the whole company, how much would that be worth? 

Andy Keeler Host

So, the bigger the company, the higher the market capitalization. Is that how the S&P works? 

Mark Beaver Co-host

That's how the S&P 500 is put together. A lot of major indexes beyond the Dow are put together that way. So, the largest companies get the highest weighting and in the S&P 500, it's just the 500 largest US companies. 

Andy Keeler Host

There's no picking and choosing who's in or who out, it just is what it is right by size, and so you know we've heard a lot recently about how I think it's called the Magnificent Seven or something like that, where the top seven companies are making up, say, 50% of the return, even though they're only seven out of 500. So, you wouldn't necessarily think that a company that's huge would necessarily have large growth numbers. Because they've grown so much in the past you would think that over time, they'd kind of peter out. I find that interesting. 

Mark Beaver Co-host

It's not unusual for the S&P 500 to be heavy at the top, more or less the top 10 companies being a large percentage of it. That's generally been the case. It can be more extreme in one period or another, and our industry loves those phrases. The Magnificent Seven or the Fab Four or whatever it is. Um, fang stocks. You know that was another one that some genius made up from Google. 

So, we love acronyms and phrases and things like that to make headlines.  So it's not unusual to have heavier weighting at the top, generally you might think a billion-dollar company. It's a lot easier to turn into a $2 billion company than a trillion-dollar company turning into a $2 trillion company. That's what a lot of people were saying when Apple and Microsoft crossed the trillion-dollar mark. And then we're sitting here today and Microsoft's over $3 trillion. So, it certainly can and does happen. 

Andy Keeler Host

All right, so the Dow hits 40,000. Mark, I know you know who Harry Dent Jr is, but for our listeners, Harry Dent is an economist that is known in our industry for his bold predictions, which, as many predictions are, are wrong. 

In 2001, in the midst of the dot-com crash, Dent predicted that the Dow would hit 36,000 by 2007 or 2008. And it's always dangerous to make very specific predictions like that in such a short period of time. And again, it's bold because this prediction was publicly made in the midst of a major market correction that had erased about half of the value of the market at that time. And when that happens, when the markets are down a lot -  investors, the public they tend to lose optimism in favor of fear and pessimism. So, in one sense Dent was prescient in that he was sort of bucking the trend at a time when people were pessimistic and thinking the Dow couldn't go anywhere. He's predicting that it would go up to 36,000. But it's also foolish to underestimate the power of the American economy, and the equity markets will inevitably hit huge heights, but his prediction as to when the market would hit 36,000 was off by about 15 years, which is pretty significant. 

Mark Beaver Co-host

Yeah, on one hand he probably understood the compounding power that we're talking about. One of your favorite Warren Buffett quotes is -- it's a terrible mistake to bet against America and now's not a good time to start. 

So, I think that embodies probably what was driving that prediction at the time. He wasn't necessarily wrong about being optimistic about the future. Yeah, his timing was wrong, and it's interesting that after that fact he kind of became known for the opposite, of having very pessimistic predictions that were also wrong in the other direction. So, it must have left some scars that he was publicly wrong about that in such a way that he 180'd himself and became the pessimist after that. 

Andy Keeler Host

So, as I said, when the markets are down, people's attitude about risk is very different than when the market is up. So, if you ask a client in the midst of a bull run the market's breaking records folks are willing to take more risk, they're optimistic, and yet when the markets decline, they sort of change their tune and go the other way. So, if we told a client in 2009, when the Dow was at 6,500, that it would hit 40,000 in about 15 years, which is where we are today, they'd look at it as if we were crazy. Fear and pessimism were rampant. So, Mark, what were some of the lowest lows of the Dow? I think it's interesting to kind of go back way, way back in time to see where the Dow was at certain points. 

Mark Beaver Co-host

So, you can see how huge 40,000 is.  With the Dow roughly 40,000 today, where do you think it would have been back in 1932? 

Andy Keeler Host

That's a toughie coming out of the Depression, sort of in the midst of the Depression. I guess 300?, 500?

Mark Beaver Co-host

Not 4,100. 41. So, 41 to 40,000 in 96 years. Yeah, you know. 1,000x growth in the Dow over that time, just crazy. 

Andy Keeler Host

You know I can't even put your mind around that kind of number. And then this recent low during COVID -- 18,000 back in 2020. So that's not quite four years ago and it's more than doubled in that period of time. 

Obviously, we don't get into market timing, I think, as Mark said, one of the favorite quotes I have from Warren Buffett is -- it's a terrible mistake to bet against America, as now is no time to start. He would say that at any point in time. He believes that every day is the right day to get into the stock market. But who could have thought, in the midst of a global pandemic, when the market's down to 18,000, that it could more than double in just such a short period of time and be breaking new records? It's again a testimony as to how resilient the market is, how resilient the American economy and the American people are. So, it's an election year, which is a very normal cause for volatility in the markets, given where we are, any clues as to what's next in the next year or two? I know it's hard to speculate in the short term, but what are your guesses? 

Mark Beaver Co-host

Yeah, historically speaking, an election year is not necessarily a bad time to invest in stocks Sometimes surprising, actually, that an average election year is slightly better than any other average year return-wise. But volatility also is a little above average, understandably in an election year, so we expect volatility to continue throughout the year. We expect there to be volatility in any year, though I like to say that volatility is the price of admission for stock investing. In the office, there's a chart that we use quite a bit that talks about volatility in stocks and it looks at the last 40 years or so in the stock market and while most of the years are positive, about 75% or so of the time the market is positive and it averages 9% or 10% a year. That's great, that's what we want to see, but it also shows within each of those years, what did the market decline from some high point to a low point throughout the year. So, they call that an entry year decline. The average of those over those 40-year period is over 14%. So, it's saying you can expect 10 to 15% drops in any given year when you're investing in stocks, not just when there's a Great Depression or something like that, just in an average year, and it doesn't mean that the world's coming to an end. 

The financial media is going to make it sound like that is the case. It's just typical. That's what happens. We should expect that kind of volatility. So, especially in a year where there's an election, we should expect that kind of volatility. 

Andy Keeler Host

I heard recently someone predicting a 10% decline in the market this year. History shows us to expect a 14% average inter-year decline. So, if we are up 10% or 11%, it would be normal to expect that kind of a loss if we haven't had that kind of a loss yet. So, there are clearly periods of time where the market sort of gets ahead of itself. The dot-com bubble we saw neck-breaking returns. I remember there was a mutual fund in 1999 that was up 180% in that year and clearly the dot-com bubble broke and ended with a crash. Market has averaged about 15% per year since 2009. What do you think that might tell us about the way forward in the next few years? 

Mark Beaver Co-host

Returns over the next few years is really, really hard. There are so many factors involved with that and, as you said, we don't really get into that game of trying to say what the S&P is going to end or the Dow is going to end at the end of the year. But if you look at long term averages -- 40 years -- S&P is somewhere around 10 percent plus or minus per year. If you go to longer periods 100 years or more it's about the same. So, call it 9 to 12 percent is a pretty typical range, depending on when you start and finish, but most years are not average. So, we hear these averages doesn't mean that you're just going to collect your 9% or 10% a year and go on your way in 2022, the stock market was down about 20%. 

The year before that it was up over 20%, so that volatility again can happen with just the amount of return that you get from one year to the next. So yeah, we don't really see that as necessarily super predictive, uh, of what's going to happen over the next few years. I think you could look at it longer term to say, if you've been running way above average for a while, lower your expectations a little bit, or in vice versa. If you've been a little under, maybe our expectations start to come up. But just because you lower your expectations a little bit, you're not going to get 9% to 10%, you're going to get 7% to 8%. It doesn't mean you shouldn't invest in stocks anymore. Those are still very solid returns. Still, that compounding effect is going to be huge with something like that. But it's a good idea to not continue to expect above average returns indefinitely. 

Andy Keeler Host

Of 15% to 16% a year. So, one of our firm's founding members, Rick Nadler. He liked to say that trees don't grow to the sky, and he really was using that in the context of the shorter term, meaning that bull markets eventually end. But over the longer term, it's not only possible but likely that the Dow will cross 100,000 mark in my lifetime. You believe that? 

Mark Beaver Co-host

Absolutely. That's the power of compounding. Investing in stocks over the long term is not gambling, it’s taking ownership, literally in the economy, in the US or around the world. You know so if you buy the Dow Jones average or you buy the S&P 500, you own part of Apple, you own part of Microsoft, UnitedHealth all of these companies that are producing billions of dollars of cash flow every year and they're growing that cash flow every year and you're a part of that growth. 

Another way of thinking about it is every day there's more and more people coming into the world. So, as our population grows in the US, as it grows around the world, that's more mouths to feed, that's more products to produce, more services to offer. So that's a big factor in the economy growing and continuing to grow. And even human ingenuity. Buffett's quote about betting against America American ingenuity, ingenuity around the world is going to create new industries, create new demand, create new productivity. New demand, great new productivity and all of that stuff drives the economic machine that makes these companies larger and larger and is going to push these indexes past all of these milestones. 

Andy Keeler Host

And I think you know talking about that population growth and innovation, as we saw from the fact that the names in the Dow have shifted over time, reflecting companies of the time. As innovation increases and things change, tastes change. Those companies will change. But the economic flow, the flow of dollars from one person to the next or to a company to buy a product or service, that's not going to change. There's always going to be demand for something. You just don't always know what that something is. 

Mark Beaver Co-host

Right, someday people will be looking back going, oh my gosh, I can't believe Microsoft was one of the biggest companies in the market. That dinosaur or you know whatever it ends up being in some other company that is either in existence now or not is going to be the top company and that's okay. You know, that's part of that progress. 

Andy Keeler Host

So, if somebody asked you today, I have a hundred thousand dollars, should I invest it in the market? You know we're breaking records. Is now a good time? What would you tell them? 

Mark Beaver Co-host

There's a lot of financial planning questions. I would ask to that first. But just ignoring all of that for now. One of our principles here at Keller and Nadler that we really embrace when it comes to investing is -- time in the market is more important than timing the market. So, to quote Buffett, maybe one last time he once said in the short run the market is a voting machine. In the long run it's a weighing machine. And what he meant by that is everybody argues with each other about what the share price of all these companies should be day to day Should it be $92 or $93? And it bounces around and does its thing. But over time the company will realize those profits and grow those profits over time and the share price will connect to that growth in reality over the long term. So basically, he's just saying think about that long term aspect of these companies and that growth, not get involved with all the noisy stuff day to day that people argue about. 

But I know hearing all-time highs, seeing headlines for all-time highs, is sort of scary. So, it can make you think I'm getting in at the top and maybe this is wrong, but the data would actually suggest otherwise. To that there is a nice study that JP Morgan published showing just the opposite, where, if you look at stock market returns going back to 1988, if you just picked any day to start investing, in general during that period the one-year return number averaged 11.7% Not too bad. But if you picked all of the days that were all-time highs instead, the one-year average going forward was 14.6. So even better results. And that also plays out over three-year periods, over five-year periods, so it's not just a short-term thing. So, the data would actually say all-time highs is not a bad thing when it comes to starting an investment. 

Andy Keeler Host

So that almost says buy high. 

Mark Beaver Co-host

I think what's happening there is, as we know, the market goes up more than it goes down. Somewhere around 75% of the time each year the market's going up and so the more times you turn that dial, the more times you win. So, if it's above 50%, you're going to see more growth than not, and it's part of its momentum. If the market has some momentum sometimes and you want to be part of that momentum, it can get a little too ahead of itself, like you said. So, when you see extremes, that can happen and be detrimental. But more often than not we're going to consistently be growing and hitting new highs. That's just part of the process. 

Andy Keeler Host

So, you want to go out on a limb here and make any guesses as to when the Dow will cross the 100,000 mark? 

Mark Beaver Co-host

I don't think so. I don't know if I want to be on record for that. It's usually not a good idea. I do feel pretty confident in saying it'll happen sometime in the next 20 years. Yeah, it would only be about a 4.7% return average to get there, so that's not saying anything too crazy. Historically, if you look at the way returns have been, it should only take about 10 to 12 years to go past that. 

Andy Keeler Host

That's amazing. Some might consider that a bold prediction, while others would call it common sense. Mark, thanks for joining us and, as always, we thank our listeners. Be sure to tune in next time for episode four how to win friends and influence yourself, making smart moves when evaluating trade-offs. I'm Andy Keeler and this is Financial Opportunities Uncovered brought to you by Keeler and Nadler Family Wealth. If you have questions on anything you heard in this episode, find out more on our website.