We hear it every day, the Stock Market has become the measure of all things.
Want to know how the nation is doing? Look to the Dow.
Feel that the President is doing a good job..or a bad one..just ask the S&P 500. Or wait, and the President himself will likely tweet his opinion.
Want to know if the latest tax proposal will be effective, see the market's reaction.
It's a quick, easy way to measure all things political and economic. And it is likely wrong.
Now, when we think about it, we know how we got here. It is so quick and easy to just quote the latest Dow Jones Average. The news reporter in a hurry to write a story or the pundit who wants to make an easy point or even the President who wants to tout an accomplishment. All quote the Stock Market Averages, when its direction agrees with their point of view.
But how did we get here? And is this the real reason behind the various Stock Averages and Indexes?
To find the answer to our question, we must go back 135 years to the New York Offices of an enterprising young Newsletter Writer, named Charles Dow.
Now Mr. Dow was trying to come up with a way to sell more of his newsletters. And in looking for a unique approach he invented the first Stock Market Average called appropriately: The Dow Jones Industrial Average.
This was a seminal event, in that is was the first time someone quantified the market as a whole. Up to this time, investors only considered individual companies. And the analysis was only done on those individual issues.
Here, now was Mr. Dow, looking at the market as a whole. And concluding, that market direction was a significant factor in the gain or loss of individual stocks.
It was a remarkable breakthrough in the history of investing.
But if we had asked Mr. Dow, back then, or any of the research companies who have since come up with their own indexes, whether their measure of the stock market was also a good measure of the current occupant of the White House? Or a good measure of any public policy? They would all have said absolutely not.
The relationship between politics and the stock market is much to complex to reduce it to a simple one on one relationship.
Yes, politics does play a role in the overall economy, of course. But so do so many other factors. Factors like, the performance of individual companies that make up the averages, the cost of finance, interest rates, and regulations, and the general health of the consumer of the companies products or services, all contribute.
In short, our economy is one of, if not thee, most complex social constructs ever. The myriad of factors that contribute to its rise and fall are nearly infinite. And so, to reduce all of that down to a simple one-factor measurement, like is the President doing a good job, is absurd.
Yet that is what we do every day when we listen to the news or even read many of the President's comments. It is a simple shorthand, used to convey a point.
But for investors, this kind of thinking can be a real danger to your returns. We need to go beyond this kind of reporting and look at the important factors underlying our investments. What used to be called the fundamentals of stock investing.
You know like earnings, management and market share, to determine whether to invest in a given stock.
And perhaps that's a good resolution for the New Year, let's get back to the fundamentals.