The 40,000 Dow Jones Industrial Average—Helping Clients BelieveAdvice to the Advisor
The S&P 500 index may be the most popular measure used by the financial media and by us professionals in discussing the state of economic affairs, but to our clients, the Dow Jones Industrial Average probably wins the popularity contest. It’s interesting that, while the S&P 500 and the DJIA are remarkably different (500 constituents vs. 30), the performance of the two indices over time has been very similar.
In discussing the future of the equity markets with clients, it’s valuable to remind them that the Dow Jones Industrial Average, in contrast with the S&P 500, is a price-weighted index that gives companies with high stock prices a higher index weighting. The DJIA measures the daily price movements of 30 large American companies, 2/3 of which produce industrial and consumer goods, with the others chosen from other sectors including information technology, entertainment, and financial services. (Transportation and utilities are not included and are covered in other indexes.)
Managing Director Dave Gilreath shares the Sheaff Brock seven-year view of the Dow Jones as a proxy for general market conditions, seeing a number on that not-so-distant horizon of 40,000. A 40,000 Dow Jones in 2025? Seems like an awfully big number, but that could turn out to be a conservative guesstimate, Gilreath believes. Here’s why:
To reach a level of 40,000 by December of 2025 the Dow Jones index price would need to grow annually by only 6.75% (not including dividends) per year, less than the 7.2% post-war average annual rate of growth in the Dow.
To us at Sheaff Brock, Gilreath continues, the economic future of the world looks much brighter than the past, considering the following factors:
- In 1975, only 37 countries were full or mixed democracies. By the end of 2016, there were 84 democratic countries. Historically, democracies don’t go to war, preferring to trade with each other. In fact, some theorists use the term “mutual democratic pacifism” to explain the motivations democracies have to maintain peaceful relations:
a) democratic leaders are accountable to a voting public
b) democracies tend to possess greater public wealth and are motivated to preserve infrastructure and resources.
- Globally, in the last decade war deaths per capita are the lowest they have ever been.
- In 1960, world Gross Domestic Product was $1.4 trillion. GDP in 1990 was $22 trillion, and, for 2017, it wast almost $80 trillion. Capitalism is winning the economic war.
- In the ’70s, U.S. corporate profits were $100 billion and today are 20 times higher than that.
With less fighting, more trading, greater profits, and greater global interdependence, can a 40,000 Dow Jones Industrial Average be far behind?