Dow Hits 40,000
The Dow Jones Industrial Average has hit a record high. What does that mean for you?
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Full Transcript below:
00;00;06;29 - 00;00;26;02
Unknown
Welcome back to 30 Minute Money. It's the podcast that delivers action oriented, smart money ideas and bite sized pieces. We're in ROC Vox recording and production studios just outside of Rochester, New York, and I have Steve Wershing with me to talk about financial things. Yes. Good to see you again, Scott. You too. Good to have you back in studio.
00;00;26;04 - 00;00;55;02
Unknown
And, big news is that that recently the Dow hit 40,000. 40,000. It's number. It's a very large number. So we wanted to talk a little bit about what that means. you know, and if if what what kind of relevance that has. So first, you know, we should say, the, the Dow Jones Industrial Average is the, you know, is the, not most widely followed, but it's the most quoted, stock average stock index.
00;00;55;05 - 00;01;14;10
Unknown
And it's just 30 industrial companies. it's an average based on that. And it, it's, it's it's meant to measure the market. It it doesn't really measure the whole market because it's only 30 companies, but that's the most widely quoted one. So when it crosses over a mark of a 10,000, that's you know, that's a big deal. So yeah.
00;01;14;12 - 00;01;32;10
Unknown
and so it, it crossed over that line the first time, back on May 16th, in the middle of the day. And then it eased off a little bit and closed just below that. But then on May 17th, actually closed over 40,000. And so everybody was throwing streamers out the window and, you know, confetti in the air and balloons and that kind of stuff.
00;01;32;11 - 00;01;53;13
Unknown
And people who know better were what was happening. I feel like that that's that's coming up. Well, yeah. Right. So, well, so, you know, just like people keep telling me as I approach my 64th birthday, you know, it's just a number. So does it have specific relevance? No. Not terribly. Well, first, let's talk about Wyatt. Wyatt?
00;01;53;14 - 00;02;08;03
Unknown
What propelled it over? Over that? You know, what gave it the little nudge over that? And that was because the Bureau of Labor Statistics came out with a report that suggested that inflation, was easing a little bit. And people see that as a good thing. People see that as a reason why the fed may lower interest rates.
00;02;08;03 - 00;02;28;01
Unknown
And so that makes people excited. And it was related to a Commerce Department report that retail sales declined a little bit in April. And you might say, well, if they declined, why are we celebrating that while we're celebrating that? Because it means the economy may be slowing down a little bit. And again, that suggests that the fed may be ready to start easing interest rates a little bit.
00;02;28;01 - 00;02;50;16
Unknown
So it's a little counterintuitive. It's a little paradoxical. so those statistics came out. Now, I don't know that I necessarily buy those conclusions. You know, the, people will respond to that kind of news, but it's a data point. So it doesn't make a trend. But it got everybody excited. So it pushed the index over that, over that limit.
00;02;50;18 - 00;03;18;10
Unknown
and you know, the short term is always driven by emotion. Long term. It it follows fundamentals. But short term a lot of those fluctuations are emotional. So that's what pushed it over the top. the if we back away from it, it's worth talking about. Not only did it just did the Dow just cross over 40,000, but, year to date it's up 5.2%, which is pretty substantial.
00;03;18;10 - 00;03;38;08
Unknown
If we look at a broader stock market index like the S&P 500, that's up 12% year to date. And so, you know, when you look at a big number like 40,000, one question that's on people's minds is should I worry that it's too high. Right. And you know so we have to ask the question, what is too high?
00;03;38;09 - 00;03;58;25
Unknown
Right. And looking at that number, that's that's why, you know, that that number itself doesn't necessarily mean anything. people may say, oh, it's never been that high before. Well, that's true, but the stock market long term goes up. That's the trend for the past few hundred years that that it over the over the course of time.
00;03;59;02 - 00;04;17;16
Unknown
So it's always going to be setting new records. Right. And I got thinking about this a little bit. So I thought it might be might be fun to look back at. You know, how far it's come since I got into the business. So I got licensed on October 20th, 1987. should we put the old should we put the old film filter on this part?
00;04;17;18 - 00;04;40;25
Unknown
That's right. Exactly. Make it grainy and sepia and that kind of stuff. And, and the Dow Jones Industrial Average, the day I got licensed, closed at 1738. Wait a second. October 20th, 1987, wasn't there? oh, yes. There was a day. That was. It was a day. Yeah. So the day before I took my test was black Monday.
00;04;40;25 - 00;04;59;17
Unknown
Yeah. I'm like, wait a second. That that's a substantial day. Yes. Finance lost 22% of its value that day. So clearly the industry was not excited about me coming into it. But you said the short term is driven by emotion. So there you go. There it is. As soon as they got word I was sitting for my exam, everybody says, well, there goes the neighborhood.
00;04;59;17 - 00;05;23;10
Unknown
We should sell out all our stocks. And but but even, you know, and at that point people were thinking, oh my God, 20, 200. Clearly a lot of people thought 2200 was way too high. And here we are at 40,000. So, you know, if the trend is always going to be up and the trend will almost certainly be up in the long term, then it's always going to be setting new highs.
00;05;23;10 - 00;05;40;24
Unknown
So we don't want to necessarily make we don't want to make a lot of, make a lot of, you know, get too worried about the fact that just crossed over a particular number that has a lot of zeros in it. So, but but we but but there certainly are things that are worth being worried about.
00;05;40;24 - 00;06;02;21
Unknown
And the thing that that is worth being worried about is that it is above the trend. So, the trend is up long term. And the, and the index will, you know, it'll, it'll it'll outperform the trend for a while. But then there's something called regression to the mean. And regression to the mean can be a real can be a real kick in the butt.
00;06;02;23 - 00;06;28;02
Unknown
because what that means is that after a period of over performance, then you will have a period of underperformance so that we bring it back to the trend line. And with the stock market being up something to the effect of about 28% over the past 12 months, that is, you know, that's pretty substantially above the trend, which means that, you know, to come back to the trend, we would need to you know, the index is we need to go down.
00;06;28;04 - 00;06;49;13
Unknown
Yeah. And bring us back to the long term. And that's something that's certainly worth worth worrying about. So the S&P 500, as I said, it's gone up about 28% over the past 12 months. But the long term annualized return on the S&P 500 since 1957 is 10.26. So the recent performance is more than twice the long term average.
00;06;49;20 - 00;07;23;07
Unknown
So, you know, that may be that may be something worth worrying about. There's a website called current market market valuation.com that suggests that the index is more than 60% above the trend. So, you know, regression to the mean is a bear. It's, it's not necessarily worth worrying about the fact that it's a 40,000, but it is worth worrying about the fact that it is substantially above trend, because forgetting about all the other economic data and what's going on in the economy, you know, one thing that we know is things tend to go back to the average.
00;07;23;07 - 00;07;41;20
Unknown
And if we go back to the average, that means the index has to fall a lot, a fair amount. Yeah. Yeah. It has to fall away before it gets there. Now, I'm not suggesting that anybody take action on this today because there's an old expression, you know, the two expressions in the in the stock market are one is that short term moves are always irrational.
00;07;41;22 - 00;08;01;02
Unknown
They're, you know, long term they will follow fundamentals. But short term it's driven by emotion and it's irrational. And the other old expression in the market is the market can stay irrational a lot longer than you can stay solvent. So just because it's outperforming and it's above trend doesn't mean it can't keep doing that for the next year or so.
00;08;01;02 - 00;08;17;01
Unknown
So it's not you know, we're not going to take any action on that. You know, as as we've talked about before, we don't we don't manage portfolios based on what we think is going to happen. We do what the market tells us. And so the market is telling us that, you know, things are great. So we're going to stay at our long term long term allocation.
00;08;17;01 - 00;08;38;23
Unknown
But we are keeping an eye on it because we are waiting for that time when it decides to to regress back to the mean and if we follow that supply and demand, which is what we look at to to figure that stuff out, the demand is still is still really very strong. So, you know, the ultimately the conclusion is don't get too worried about the fact that it's 40,000.
00;08;38;25 - 00;08;53;15
Unknown
the absolute number is really not that important. But watch the trend because if it continues to be above the trend, the longer it stays above the trend, the more likely it is it's going to have to correct and go back to the trend.
00;08;53;17 - 00;09;28;10
Unknown
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00;10;23;06 - 00;10;44;02
Unknown
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00;10;44;02 - 00;10;51;20
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