I heard somewhere that speculation can be one of the greatest triggers of fear and panic. We have certainly seen how speculation (good or bad) can affect our markets, and in turn how it can affect the Dow Industrial Average, and so on. Speculation can easily set off a sort of domino effect, taking down everything in its path, so how do we control it? Well in my opinion you can’t, it is impossible. Perhaps, though, you can change other things in the financial world to ease some of the destruction speculation can cause.
I read an interesting article yesterday by Bernard Condon which, in a way, suggested a change that could possibly help cut off speculation in its path – it recommended getting rid of the Dow. When I first read that I thought it was a crazy idea – you could never just get rid of the Dow! As I read the article, however, it made me think that it wouldn’t be the worst idea to hit Wall Street.
The Dow average tends to affect the moods of investors, if it’s up everyone is happy to invest and buy stock and if it is down people become cautious and want to sell right away. But what if there was no Dow? It is easy to think that with the Dow slowly climbing these past 4 months that this means a lot of companies are bouncing back, but that is not necessarily true. A company’s values can be distorted by the Dow.
Did you know that one company, just one, is responsible for 40% of the Dow’s climb since January? Caterpillar Inc. has affected the stock market index more than any other company, and without it the index would only be up 2.5% this year instead of the current 4.1%. Also, if you took out the four biggest contributors to the index, we would in reality be looking at losses, instead of gains.
So it made me think, what is the Dow really telling us? It is very “top heavy in nature” as the article stated, so is it really presenting the information that is helpful when deciding how to invest your money? The distortion of the indexes (and not just the Dow but the S&P as well) are lifting stock prices up and who knows what that will lead to? This is not new information and everyone knows that the systems are flawed, but with such a touch and go market, are we willing to let speculation and distortion get the best of us and our investments?
What do you think – should the Dow stay or go?