May 7, 2008
Why is the Dow Jones Index so high with the economy down?
By admin
Written by Michael Vass
For those that may have read my prior posts on crude oil prices (Revising my prediction on a higher oil price, since I was right) the fact that oil has now crossed $123 per barrel is only surprising in the fact that it has happened so early in the year. The factors that are push oil higher have yet to change and now include the inflationary actions of the Fed in cutting rates so long after the economy has slowed.
But in looking at the wider impact one of the first places to observe is the Dow Jones Industrial Index. And looking at that provides a big question. Why is the Dow reacting so well?
As of this post the Dow closed at 12,814. That’s down a mere 206 for the day. And since the beginning of the year the Dow is barely below the 13,000+ level we started at. Yet Gold has soared to over $1,000 at one point and as mentioned above oil. It seems counter intuitive that the Dow should be so strong.
Until you look at the underlying companies in the Dow. 7 of the Dow companies are actually benefiting from the current economic environment. Either the severe drop in interest rates, higher prices for metal, and/or higher oil have sparked profits. Those companies are:
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Alcoa
American Express
Bank of America
Chevron
Citigroup
Exxon
JP Morgan
Add to those directly benefiting are those that are feeling neutral to a slight positive effect from the economic environment. 14 of the Dow Jones companies fall into this category. They are:
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Coca-Cola
Du Pont
Hewlett Packard
IBM
Intel
Home Depot
Johnson & Johnson
McDonald’s
Merck
Microsoft
Pfizer
Procter & Gamble
Wal-Mart (questionable)
Disney
And example of this effect can be seen in Cisco among many others.
Effectively 21 of the 30 companies are not reflecting the difficulty and pain that the nation directly feels. Computers and the internet don’t care about crude oil, Food and drink are virtual cultural requirements – celebrating good times and comforting in bad, drugs required regardless, and so on. As such it is only now that inflation fears are cropping up that more of these companies are being touched.
If you were to go back into time and remove several of these companies with their preceding Dow 30 members you would get a very different view, and an Index that would be floundering. Replacing Sears, Goodyear Tire, Kodak, AT&T, International Paper, and Philip Morris would show how bad the economy is.
The removed companies are the core of what is being affected in America today. Consumers are spending less on discretionary items and whenever possible they buy these at as big a discount as possible. New cars or replacement parts are cutting deeply into the pockets of families. New technology (specifically the internet) is cutting into the older businesses with lower overheads and less physical items. And both older industries and workers are struggling to adapt new technology in their way of life, hurting their profit/wage potential.
So when I look at the markets, I realize the Blue chips aren’t blue for their fancy blood, but because they are holding their breath lest they drown.
But that’s just one opinion right now. What’s yours?
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