Marc Cuniberti: Is the rally for real?
December 3, 2017
With the Dow Jones Industrial Average (DJIA) racing to new highs almost daily, one has to ask, what is driving this market?
Certainly there are enough Donald Trump haters to cast a dim light on anything financial, where even many are doubting the civilized world itself will survive if Trump continues as president.
But one cannot deny that the DJIA has loved this president, as evident by the rally that has been in place since he was elected.
With the DJIA making news headlines with every milestone it passes, the news might entice some investors to review their statements and then call their advisors to see why they haven't doubled their money in light of this almost relentless rally.
Although the DJIA is the most talked about index in the media, it encompasses only 30 stocks of the thousands that are out there in the various marketplaces.
The question some may ask: is the Dow a realistic representation of the market in general and the economy?
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On the latter, I have always said the market will reflect reality eventually but its day to day movements are only the sum of the perceptions of all the players in it at any given time.
The perception of the market
For example, late in the housing boom cycle after Bear Sterns collapsed two funds tied to mortgage products (the proverbial first domino to fall in the real estate blow up), the reality was the housing crisis was already in its early stages of implosion. That was the reality.
The perception however was that real estate never falls in value and any set back would be temporary. Housing stocks therefore continued to climb as the housing market was beginning its historic collapse.
The perception that all was OK drove these stocks ever higher even though in reality the real estate market had already turned. The market did however eventually reflect that reality when all the indexes worldwide eventually cratered miserably.
That being said, the perception at least up until now, is the economy is strong and the stock market is justified in roaring upwards.
Certain things however might not add up and be confirming of the apparent strength of in the market meaning not all assets are firing on all cylinders.
If the economy is galloping forward in strength, one might expect the commodities and energy sectors to be in high demand and therefore screaming upwards as well.
Such in not the case, at least in the proportions the Dow has climbed.
Indeed some energy and commodities have languished badly and or gone nowhere (Yahoo.com). Since booming economies need energy and commodities, why have we not seen these asset classes go up in concert?
Additionally the Dow index is very limited in what is has in it. Remember it only has 30 stocks out of thousands and only seven stocks make up almost half of the index weighting (42 percent — Forbes.com).
Some have even speculated the people who decide on what stocks go in the Dow rotate the losers out and replace them with winners in order to make it look better. This idea was put forth by QZ.com in an article by J.L Zargosky.
of Slate.com goes so far as to call the DJIA a "nonsensical index" due to how it is purposely constructed to favor more positive results.
Indeed just the fact that the DJIA contains only 30 stocks might be enough to convince the investing public to better observe how the market in general is performing by looking at a variety of indicators and markets. Indeed many of those indicators are positive.
But because most investors hold a variety of assets in their portfolio which include assets that might move in opposite of a rising market, and because there are stocks in many areas that have actually gone nowhere or even fallen in the midst of this rally, it's likely few portfolios have seen proportional increases their value that the DJIA has.
Additionally because fixed income investments (bonds and preferred stocks to name a few) may have moved opposite of the rally, some portfolios may actually have lost value.
Keep in mind this is not a solicitation to buy or sell any securities. It is not possible to invest directly in an index. Past historical movements in any security does not guarantee future performance.
This article expresses the opinions of Marc Cuniberti and are opinions only and should not be construed or acted upon as individual investment advice. Cuniberti is an Investment Advisor Representative through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. He can be contacted at MKB Financial Services 164 Maple St. #1, Auburn, or call 530-823-2792. MKB Financial Services and Cambridge are not affiliated. His website is http://www.moneymanagementradio.com.
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