12 January 2007

Dow Jones Stock Index Hits Record High, Again

Foreign investors miss some gains due to currency differences

Washington -- The Dow Jones industrial average index, a measure of 30 stocks meant to gauge the performance of the U.S. equity market, rose more than 72 points January 11 to finish the day at 12,514.98:  the highest level since its debut in 1896.

Experts say the Dow's recent robust performance is evidence of market recovery from the sharp declines of the 2000-2001 period, but they caution against investing or divesting just on reports of new highs; stock market indices are not calibrated to predict strong future growth in share prices or, conversely, a correction downward. 

Furthermore, for foreign investors, converting foreign currency into U.S. dollars to buy stocks has yielded much smaller profits than those gained by U.S. investors recently.

It took more than six years, until October 2006, for the Dow Jones index to surpass its earlier all-time record set in January 2000.  But in the last three months, there have been 23 record closes. "It's crazy," said Michael Goldstein, a finance professor at Babson College in Massachusetts, who worries that the Dow should not be this high.

Other major U.S. stock indices - the Standard & Poor's (S&P) 500 and Nasdaq composite - rose January 11, though not to record levels.  On any given day, earnings reports from a few large companies or good news about oil prices can affect the numbers.  But these indices have risen steadily for months.  The Dow rose 16 percent in 2006; the S&P 500, 14 percent; and the Nasdaq, 10 percent.  The movement represents investor confidence that interest rates will remain low and corporate profits will stay strong in the coming year. 

WHAT IS IN A NUMBER?

Even though a new record can be a psychological lift for investors, it is just an "arbitrary event," not an indication of certain economic health or wealth, said Rich Whitney, vice president of T. Rowe Price, a Baltimore investment management firm.

The number itself - 12,514.98 at the Dow's January 11 close - results from adding the prices of 30 large companies' shares and then dividing by an index divisor.  The Dow Jones industrial average began in 1896, and General Electric Company is the only original component that remains.

John Prestbo, director of the Dow Jones index, said that, despite the popular notion that these are "smokestack [industrial] companies," they are not.  Editors have added service companies to the mix - most recently, in 2004, American International Group Incorporated (insurance) and Verizon Communications Incorporated.

News headlines from Dow Jones scroll on the "zipper" around the Times Square Building in New York, January 25, 2006. (© AP Images)But because the Dow includes only 30 companies, many experts use additional indices to gauge the market.  "I look at the Dow every day, but when I'm really curious about what's going on, I look at the Standard & Poor's 500," said Goldstein. 

Whitney describes the Dow as a measure of slower-growing, mature companies and the S&P 500 as a broader "barometer" that includes 500 companies, mature and faster-growing, across many industries.

The S&P 500 crossed the 1400 plateau in November 2006 for the first time since 2000.  Its highest-ever close (at 1527) was March 24, 2000.  "It won't take long to get a new high," said Whitney.  "The economy is stronger ... earnings better, interest rates lower," all reasons to expect the index to move higher than then.

Another oft-cited index is the Nasdaq composite, which includes all 3200 companies listed on the Nasdaq stock exchange.  These are smaller, technology-oriented companies. The Nasdaq closed January 11 at 2484.85, less than half the level it had reached in early 2000. 

The Dow is hitting records while the Nasdaq rises more slowly because during the late 1990s, the technology sector, and thus the Nasdaq, was flying high, according to Whitney. 

WHAT IS AN INVESTOR TO DO?

In recent years, investment in U.S. securities by foreign corporations and individuals has "picked up strongly," according to Chris Gohrband, of the U.S. Commerce Department.  Foreigners spent a net $86 billion on U.S. stocks in 2005, up 44 percent from the $60 billion in purchases the year before. 

But do record-high numbers for major stock indices signal to investors that it is time to sell?  Goldstein, who has served as visiting economist at the New York Stock Exchange and chair of the Nasdaq economic advisory board, said investors should "focus on being better doctors, lawyers, reporters and street cleaners, not on timing the market."

As to buying, Whitney cautions that recent gains have helped U.S. investors more than foreigners due to currency differences.  Even though the Dow was up 19 percent (when including dividends) in 2006, he said, "if you were an investor in the U.K. and sold pounds to buy dollars and invested in the stocks represented in the Dow, then sold the stock at the end of the year and converted your dollars back into pounds, your performance was only about a 4.5 percent increase."

Still, he said, foreign investors will continue to buy U.S. stocks for the long term to gain exposure to global U.S. companies operating in an extremely global economy.

By Elizabeth Kelleher
USINFO Staff Writer