What NOT To Do When the Dow Tops 17,000-- Your Weekly Update

Usually, we resist the temptation to amplify any particular S&P 500 “milestone.” This week is a little different.

We think you’ll enjoy our take on what this significant level can mean going forward.

All the best,
Lee and Jeremy


This Week’s Quote:

“The dumbest reason in the world to buy a stock is because it’s going up…”
― Warren Buffett


JL Davis Thoughts This Week:

Last week when the Dow Jones Industrial Index (DJIA) crossed 17,000, there was no party at JL Davis. In fact, it was just another day. But it IS fun to reflect a bit.

On May 26, 1896, journalist and Wall Street Journal founder Charles Dow introduced the way to follow stock market trends. The Dow Jones Industrial Average originally had twelve stocks in it, and the value of those stocks was determined once a day with paper and pencil. Getting to the average was easy: simply add up the total value of one share of those twelve companies’ stock, then divide by twelve. At that time, the Wall Street Journal observed “the stock market is in the nature of a barometer which reflects the rise and fall of general conditions”. The Dow Jones wasn’t expanded to 30 stocks until 1928, where it has remained since. The only original Dow company component still in the index is General Electric.

On its very first day, back in 1896, the Dow closed at 40.94. Three months later, it plunged to 28.48. It then took ten years to get to 100. Some thirty-six years later, on July 8, 1932, the Dow Jones reached its bottom at 41.22 at the nadir of the Great Depression, just ¼ of 1% above where it started. Ouch.

So when the Index (whose composition has changed mightily over the years) closed at 17,000 last week, it was some 400 times greater than where it began 118 years ago. We’re not impressed, though. Why?

Warren Buffett expressed our sentiment completely when he said, “For some reason, people take their cues from price action rather than from values...The dumbest reason in the world to buy a stock is because it’s going up.” We couldn’t agree more.

While we’re happy to continue investing at today’s elevated stock market levels as part of an overall financial strategy to stay exposed to the ownership and profits of fine companies, we are well aware that every stock market high throughout history has been followed by a decline. And vice versa. Though we think there is nothing in particular on the horizon to indicate that a decline is forthcoming at present, the fact is that there are always the seeds of one present—just as there are today.

This week marks the unofficial start of “earnings season” with Alcoa reporting their corporate earnings today. Many companies follow over the next couple of weeks and this earnings season will provide an important gauge with which to measure the potential continuation of the market trend that started back in March 2009 with the Dow just above 6000.

As we approach a 300% increase in that number, we’re happily cautious as always. But the time-tested strategy of sticking to a well thought out plan will continue to be our guide, not any particular market milestone.

http://seekingalpha.com/article/2303675-why-the-dow-hitting-17000-doesnt-matter
http://en.wikipedia.org/wiki/Charles_Dow
http://online.wsj.com/articles/125-years-of-change-in-the-u-s-economyand-the-dow-1404763584


Market Week: July 7, 2014

The Markets

After generally positive economic data once again suggested that the economy really did begin to rebound this spring, the Dow industrials surpassed 17,000 for the first time, while the S&P 500 hit three new all-time records during the week. And as investors embraced stocks, worries about the potential impact of a strong economy on potential Fed rate increases also sent the benchmark 10-year Treasury yield up and the price down.

Last Week's Headlines

• The unemployment rate fell to 6.1% in June; that's 1.4% lower than a year earlier and the lowest level in almost six years. The economy added 288,000 new jobs during the month, higher than the 272,000 monthly average since March. The data, coupled with upward revisions to payroll figures for April and May, suggested possible acceleration in job growth. The Bureau of Labor Statistics said the widespread job gains were led by professional/business services, retail, restaurants/bars, and health care.
• A 2% increase in new orders placed with U.S. manufacturers put orders at their highest level since late 2013. Even though the Institute for Supply Management's index showed that manufacturing growth didn't accelerate in June, it still remained at a healthy 55.3% reading (any number above 50 represents expansion). The ISM's measure of the services sector also showed slightly slower growth than the previous month, though the reading remained at a robust 56.3%.
• After three straight monthly increases, new orders for U.S. manufactured goods slipped 0.5% in May, though most of the decline was in the volatile transportation sector. The Commerce Department also said inventories were at their highest level on record and have increased 18 of the last 19 months.
• Commercial construction spending rose 1.1% in May, but the Commerce Department said that was largely offset by a 1.4% drop in the value of new home projects. The 0.1% overall increase in construction spending was weaker than April's 0.8% gain, but the annual rate was 6.6% higher than a year ago.
• As expected, the European Central Bank left two key interest rates unchanged, hoping that measures taken last month will be enough to help stimulate the economy.
• Higher auto-related exports and less spending on imported oil and consumer goods helped cut the U.S. trade deficit by 5.5% in May to $44.4 billion, according to the Bureau of Economic Analysis.
• The U.S. Supreme Court ruled that closely held, for-profit companies can choose to opt out of a provision of the Affordable Care Act that requires that employees' insurance include coverage for birth control. The court also ruled that workers who aren't full-fledged public employees cannot be required to pay fees to a union even if they benefit from its collective bargaining efforts.
• Two separate assessments suggested that China's sluggish manufacturing sector may be rebounding. The reading on the Chinese government's purchasing managers' index nudged up slightly to 51 in May. Meanwhile, HSBC/Markit's Manufacturing PMI was basically flat but stayed in expansion territory, apparently responding to small steps taken by the government to stimulate economic growth.


Key Dates/Data Releases
7/9: Federal Open Market Committee minutes


Eye on the Week Ahead

In a week that's light on fresh economic reports, investors may begin to focus on the Q2 earnings season, which has its unofficial start on Tuesday when Alcoa reports. Minutes of the most recent Federal Open Market Committee meeting could shed new light on the debate over whether the Fed should be concerned yet about inflation.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.