Making Sense of Dow's Record-Breaking Performance

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Last week was one for the record books, for sure. We saw records fall, and then new records succumb to newer records, which in turn gave way to even newer records. We saw the five-and-a-half year old previous all-time high on the Dow Jones Industrial Average taken out on Tuesday. Then Tuesday’s record high taken out Wednesday; Wednesday’s taken out Thursday; and, you guessed it, Thursday’s high was taken out Friday. The Dow closed on Friday at 14,397 – nothing short of remarkable considering where we were just four short years ago.

Is anyone else not entirely shocked by all this record breaking? Is it really a surprise that companies are generating higher revenues and profits than they were 5-, 10-, or 20 years ago? Another record that gets broken every single day and gets very little attention is our planet’s population – and it seems to me that this is the record that is driving all the other records, isn’t it? There are more people on Earth today than there were yesterday. And there were more people yesterday than the day before, etc. This is not a secret.

In a pickle

There is a record amount of “stuff” being produced today: Food, Automobiles, Smart phones, Books, Beer, Printers, Sneakers, Airplanes, Nuts, Bolts, Gadgets, Doo-hickeys and of course the absolutely necessary pickle grabber.* Why is this surprising? People need these things and there are more of us today than ever before. P.T. Barnum was famous for saying “Give the people what they want.” He was also famous for saying “A sucker is born every five minutes” (I believe this is what the seller of a pickle grabber is banking on).

Companies generally try to produce, market, and sell something that consumers are willing to pay for, whether it’s a service or good. The idea is that consumption will increase over time not just because economic advancement will continue ad nauseum, but also because there will be more consumers (companies’ primary target market) next year, and the year after…. It’s actually quite simple. As long as civilization continues to move forward and unless grunge comes back with a vengeance, I’d say companies like Colgate Palmolive have a pretty sound business plan. Develop/process the things people need (or think they need) and market/sell those things to people who can afford to buy them.

But just because there are a few billion more people on the planet today than 40 years ago doesn’t mean any of them will be able to afford to buy what you’re selling, does it? No, not necessarily, but it is the best interest of just about everyone (except Kim Jong Un) that they can. The consumption power and expansion of the middle class is a big part of what drives higher prices in the first place. In spite of all our complaining about it, inflation is crucial to our economy’s advancement. Remember, it’s not just the price of food and gas that goes up. If the value of our homes (the single largest contributor to the US economy) never appreciated – or even worse, they tended to lose value over time – why would you ever borrow money to buy one? If things cost more money today than they did in the past, and the number of consumers is at its largest point ever, doesn’t it make sense that we also need more dollars in circulation?

The old woman next door

Have you ever spoken to an older person who has been living in their home “free-and-clear” for decades, and cannot believe that something they paid just $100k for (back in 1973) is now worth $800k? Is that surprising or impressive? I don’t think so. It just means the home’s value has doubled three times (100, 200, 400, 800). The “Rule of 72” states that an investment earning a return of ‘X’ will double every ‘Y’ years, where Y is 72/X. For instance, if an investment earns 8% annually you should expect to double your money every 9 years (72/8 = 9). So is it good that Gertrude’s home price doubled three times in 40 years? Not particularly.

Don’t be shocked when your portfolio hits a new all-time high. Don’t let a new personal best distort your view of what “could” or “might” happen next. If you are investing well, you should be making money over time. You should expect slight corrections (5-10%) once a year; you should also be prepared for a major correction (10-20%) every couple of years, that’s just part of the game. But if you are living in fear of the crash around the corner, you may be missing out on the very real growth the rest of us are enjoying in the meantime. Market crashes like 2008-09 happen, on average, once a decade. They are scary. Just remember, though, you wouldn’t want to drive using only your rearview mirror….

If your portfolio isn’t at an all-time high, maybe there is something you could be doing better. Please feel free to give us a call if you are interested in our take on what that might be.

* The irony that the company selling the pickle grabber is called Lehman’s is just too sweet to not point out. Personally, I use a combination of fork and fingers to complete this task.

Adam B. Scott
Argyle Capital Partners, LLC
10100 Santa Monica Blvd, #300
Los Angeles, CA 90067
310.772.2201 (Main)