Market Commentary: Winding Down 2020
"Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning." – Winston Churchill
This quote seems appropriate given the current state of COVID and the news of potential vaccines. While news of new virus cases continue to go up, the market is acting indifferent to this as it feels like we’re close to a new era of our post-pandemic world with three vaccine candidates showing over 90% effectiveness. Predications like this can be fraught with the danger of being wildly wrong as there are so many moving pieces before any vaccine is approved.
Oh, and I heard there was an election this year.
With the US presidential election declaring Joe Biden as the winner there is a sense of a return to a more traditional (see normal) way of conducting business. However, given the divisions in the US electorate and the Senate up for grabs, time will tell on this front also. We at Aura Wealth Management continue to be cautious and carry more than a normal cash weighting in our portfolio.
The Dow Jones Industrial Average hit a milestone November 24, closing above 30,000. According to the Wall Street Journal this is an extension of an eight-month rally that started after the Federal Reserve indicated it will do whatever it can to support the economy amid the pandemic. The run has put the index up 62% from its March low. RBC’s Global Insight daily newsletter discussed the origins of the blue-chip index and how it became one of the most widely used gauges for the health of financial markets on Wall Street. I thought it would be worth sharing with you.
The index was initially created by Charles Dow, the first editor of the Wall Street Journal, as a means to explain the movements in the market to the readers. In 1896, the paper published an average of 12 stocks daily. This industrial average expanded to 20 members in 1916, and then 30 names in 1928.
What is it?
Today the Dow Jones Industrial Average (DJIA) tracks the stocks of 30 large U.S. companies, which includes all sectors with the exception of utilities and real estate. The DJIA is different from the S&P 500 as it is a price-weighted index, while the latter is weighted by market value. This creates variances in how the indices move. For instance a 5% increase in UnitedHealth Group, which closed at $336 on Tuesday, November 10, would have a bigger impact on the Dow than a similar rise in Apple which trades at $115. When it comes to the S&P 500, however, changes related to Apple shares have a larger impact as it is about six times bigger in market value than UnitedHealth.
How much money follows the index?
According to the Wall Street Journal, by the end of 2019, $28 billion was indexed to the Dow in investments products that aimed to replicate its performance. That figure for the S&P 500 was $4.6 trillion.