On December 13, the Dow Jones Industrial Average officially closed above its old high…
The index hadn’t made a record high since January 2022.
Now, I understand if your first reaction is, “Who cares?!“
After all, the Dow is 127 years old. And it only tracks a basket of 30 large U.S. companies.
Heck, despite its official name, the index isn’t even that “industrial” anymore. Tech giant Microsoft (MSFT) is one of the top 10 holdings. And Salesforce (CRM) is a major holding.
But today, let’s talk about why we should care about this milestone…
First, as I said, the Dow is really old.
It’s the second-oldest stock market index in the U.S. It was created in 1896. (If you’re curious, the Dow Jones Transportation Average is the oldest index. It started in 1884.)
Admittedly, the Dow isn’t perfect…
You see, most indexes these days are “market-cap weighted.” That means stocks with the highest market caps make up a bigger chunk of the index.
But the Dow doesn’t work like that…
Instead, it’s “price weighted.” That means the company with the highest share price is the largest holding. Right now, that’s UnitedHealth (UNH). Its stock is around $520 per share.
This type of weighting is nonsense…
After all, we live in a world of stock splits and fractional shares. That means a company can adjust its share price at any time without changing the true value of the shares.
So why does an old index with a goofy measurement system matter?
That’s easy…
It tells us something important is happening with the broad market.
These days, the world’s largest companies by market cap dominate indexes like the S&P 500 and Nasdaq 100.
As a result, many so-called “broad market” exchange-traded funds (“ETFs”) just measure what the biggest players are doing. They struggle with measuring actual economic activity.
So it’s incredibly important to see the Dow making new highs. Despite the index’s flawed weighting system, this basket of stocks gives us a vital look at the U.S. economy.
Even better, history tells us that new highs for the Dow are a “bullish” sign…
I recently looked at the Dow going back to 1950. And what I found was clear…
After a new 52-week high in that span, the Dow went on to gain an average of 7% over the next year. The average return over all one-year periods since 1950 is only about 4%.
This indicator has a 71% win rate, too. That means 71% of the time since 1950, the Dow has been higher a year later.
In other words… history tells us to expect more good times in 2024.
It’s no wonder the SPDR Dow Jones Industrial Average Fund (DIA) receives a “bullish” rating from the Power Gauge. Based on history, it’s likely headed even higher over the next year.
Now, that doesn’t mean we should just pour our money into this ETF. After all, the Power Gauge helps us spot specific sectors and industries that are outperforming right now.
Still, it’s great to see the broad market surging. Even the Dow is on the move today.
Good investing,
Vic Lederman
