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By the numbers
The Dow Jones industrial average reached a record all-time high on Tuesday. Here are some numbers to put that fact into perspective:
14,253.77 – Tuesday’s close
6,547.05 – March 9, 2009 close, the market’s low point during the Great Recession
7,706.72 – Recovery in points since bottoming out
118 percent – Four-year gain as a percentage
14,164.53 – The previous record close, reached on Oct. 9, 2007
– Associated Press
how it happened
Prices matter.
That’s crucial to understanding how the Dow Jones industrial average climbed to a record high of 14,253.77 on Tuesday.
The Dow is a price-weighted average, which means that each $1 move in the price of a Dow stock has the same effect on the average. Companies with expensive stocks have more power to drive the average higher or lower.
A relatively small number of high-priced, strong-performing stocks have driven the Dow to its current level, such as IBM, McDonald’s, Home Depot and Wal-Mart Stores.
IBM has been the biggest driver of the Dow because its shares are priced far higher than the other 29 stocks within the average. IBM closed on Tuesday at $206.53, compared with $117.93 for Chevron, the Dow stock with the second-highest price.
In fact, IBM contributed 59 percent of the Dow’s overall gain since Oct. 9, 2007, when the market recorded its previous high, according to analyst Howard Silverblatt of S&P Dow Jones Indices. Because of its high price, IBM makes up roughly 11 percent of the overall weighting of the Dow. Chevron accounts for just over 6 percent.
Using the Dow’s price-weighted method of calculating the average, other top contributors have been McDonald’s (26 percent), Home Depot (25 percent) and Wal-Mart (19 percent). The Dow’s price-weighted approach differs from that of many other stock indexes, including the Standard & Poor’s 500. That index of 500 stocks is market cap-weighted – the greater the overall value of a company’s outstanding shares on the market, the greater impact that stock has on the index’s movements.
The two largest companies by market capitalization within the S&P 500 – ExxonMobil and Apple – make up 2.97 percent and 2.90 percent of the index.

Opinions mixed on Dow surge

Industrial average a record

Our long national economic nightmare is over.

Maybe.

The Dow Jones industrial average reached a record high Tuesday, closing at 14,253.77.

But whether that is cause for celebration or caution is a matter of perspective, northeast Indiana investment advisers say.

Neil Donahoe said Tuesday was just the tail end of a rally that started six months ago.

“We think this rally is real,” with plenty of room for stock prices to move higher, said the senior vice president and chief investment officer of SYM Financial Advisors in Winona Lake.

Donahoe compared the stock surge to a nine-inning baseball game. He estimated we’ve reached only the second or third inning of growth.

The Kosciusko County professional pointed to strong corporate earnings as the source of his optimism. After cutting spending during the depths of the recession, companies have amassed about $2 trillion in capital on their balance sheets.

Yes, that’s trillion.

The stockpiles have allowed some companies to issue higher dividends, buy back stock and invest in new projects, Donahoe said. Those overflowing cash reserves make this stock market peak more credible than those reached in 2000 and 2007, he said.

But behind every optimist is a pessimist – or maybe realist? – shaking his head.

Enter Ian Boyce.

The certified financial planner, a partner in Dickmeyer Boyce Financial Management Inc., was less giddy Tuesday afternoon.

Boyce said he’s been watching the numbers cautiously.

“While I think there are some underlying improvements in the economy … there’s still some things that give us pause,” he said.

Boyce listed fewer filings for new unemployment benefits claims as a good thing. And the housing market is recovering.

But those positives have to be weighed, he said, against negatives including long-term U.S. debt and federal officials’ role in artificially propping up the stock and bond markets by buying up trillions of dollars of bonds in a program called “quantitative easing.”

By driving down bond yields, the feds made the stock market look much more attractive to anyone wanting more than an anemic return.

The successful effort will eventually end, Boyce said. That’s when reality hits.

From that perspective, he said, the market could be considered overvalued.

“It’s difficult to perceive where we actually should be,” he said.

Boyce and Donahoe agree on at least one thing: Don’t get excited and rush into the market.

Take time to review your goals. And plan to hold onto stocks for at least five to 10 years, they said.

“We are definitely an advocate of having a very diversified portfolio,” Donahoe said.

He recommends a mutual fund or exchange-traded fund based on the Standard & Poor’s 500 index. The broad mix of stocks includes companies in various sectors of the economy.

Boyce recommends dollar-cost-averaging. The strategy calls for regularly scheduled stock or mutual fund purchases, regardless of where the market closed the previous day. Advocates say it yields the most profits over time.

Despite his cautious approach, Boyce considers himself rather bullish about the stock market. Over time, it’s been a reliable way to make money.

Investors who got nervous and pulled out when the Dow bottomed out in 2009, he said, have missed out on this portion of the recovery.

sslater@jg.net

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