5 Things Everyone Should Know About Dow 20,000

Dow 20,000 – an incredible milestone! The Dow Jones industrial average is nearing the 20,000 mark for the first time, and when the barrier is broken, Americans watching the evening news, tuning in to the radio or aimlessly browsing the internet will see the headline, whether they care about it or not.

Should investors really care? Should anyone? And the answer is: yes and no.

Regardless of what importance level you assign to Dow 20,000, here are five things everyone should know about Dow 20k.

1. The Economy is Improving and so are Expectations

This one may be obvious, but with the Dow and other stock market indices at all-time highs, things are getting better. Over the last 81 months the private sector has added an impressive 15.6 million jobs, and in November the unemployment rate hit 4.6 percent for the first time since August 2007.

On top of that, when the Federal Reserve raised interest rates interest rates on Dec. 14, Chair Janet Yellen said the hike was “a reflection of the confidence we have in the progress the economy has made and our judgment that progress will continue … the economy has proven to be remarkably resilient.”

Consumer confidence also improved in November, reaching pre-recession levels once again. As expectations improve, you can generally expect to see the stock market rise as well.

2. The Dow Actually Isn’t a Great Reflection of the Business Landscape

If the first point was a little straightforward, this one may be the most misunderstood: The Dow is definitely not the best measure of how American businesses are performing. That 20,000 figure? That’s only based on the share prices of 30 of the largest companies in the U.S.

“The Dow represents 30 large stocks. The S&P 500 represents nearly 17 times that number,” says Kevin Barr, head of investment management at SEI, an investment management firm headquartered in Oaks, Pennsylvania. “Both the Dow and S&P leave out the mid- and small-cap companies that form much of the stock market, which comprises thousands of stocks. While the Dow is commonly cited as a benchmark, investors need to keep its size and scope in mind.”

On top of that, the Dow is a price-weighted average, which means that stocks with higher share prices carry more influence. Nevermind that this is an entirely arbitrary way to do things. Currently, Goldman Sachs Group (GS) carries the heaviest weight in the blue-chip index at 8.38 percent, while Cisco Systems (CSCO) has the lowest weight at 1.06 percent.

Thus, if CSCO jumps 10 percent after a great earnings report, but GS falls just 1.3 percent, the two cancel each other out as far as the Dow is concerned. This despite the fact that at $153 billion, Cisco is actually worth about $56 billion more than Goldman Sachs.

While the S&P 500 is a better measure of how corporate America is doing, a better measure still is the Russell 3000 and Wilshire 5000, which track thousands of smaller stocks and represent essentially the entire U.S. stock market.

Unlike the Dow, the S&P 500, Russell 3000 and Wilshire 5000 are all market capitalization-weighted.

3. Put Dow 20,000 in Perspective

Due to the power of compound interest, 100-point – or even 1,000-point – swings in the Dow don’t mean what they used to.

Think about it this way: The Dow first crossed the 1,000 mark in November 1972. It would take more than 14 years for the Dow to gain the next 1,000 points, which it accomplished when it first broke 2,000 in 1987. In contrast, the Dow hit 19,000 on Nov. 22, and is approaching 20,000 less than a month later.

So if you hear that the Dow went up or down 100 points in a day, don’t put too much stock into it. In 1972, that was a 10 percent move. Today, it’s a half-percent.

4. A Few Minor Changes in the Index’s Constituents Make a Huge Difference

Further adding to the arbitrary nature of the Dow, the index’s 30 constituents aren’t set in stone like many people might think.

Every few years or so, if it’s necessary, the index committee will add some new member(s) to the index; the incoming stocks will often replace stocks or companies that have been faring poorly or are losing influence.

Sometimes, those decisions can seriously hamper the index’s returns.

The Dow, for instance, added Intel Corp. (INTC) and Microsoft Corp. (MSFT) in late 1999, near the height of the dot-com bubble, only to see both crater over the subsequent year. It would take until 2014 for MSFT and INTC to regain their debut Dow levels.

The most recent Dow addition is Apple (AAPL), which replaced AT&T (T) in March of 2015. Since then, Apple is down 6 percent and AT&T shares are up 24 percent.

David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices, says companies aren’t added to the index because their stock looks attractive. “We’re not picking stocks that we think are definitely going to go up. I know one guy who can’t pick stocks, and that’s me,” Blitzer says.

“With the Dow we’re looking for large, solid, stable companies,” he says. “Most of them if not all of them are household names, people know who they are, and it’s traditionally blue-chip companies.”

5. Just a Psychological Level

Finally: traders just like to see big, round numbers with lots of zeros after them, and investors do too. Crossing a level like Dow 20,000 has no fundamental importance, but technical and short-term traders, as well as trading algorithms, may put some stock in it.

Over time, we’ll be hitting a lot of these psychological marks, says Jon Ulin, a certified financial planner and managing principal of Ulin & Co. Wealth Management, a branch office of LPL Financial in Boca Raton, Florida.

“Since World War II, the Dow Jones index has averaged about 9 percent per year and will continue to do so hitting new highs over time. Just with a meager 7.2 percent annualized return, we should be ringing in a 40,000 Dow by 2027,” Ulin says.

It’s been 44 years since the Dow first hit 1,000 in 1972. If it takes 44 years for the next Dow 20-bagger, we’ll be ringing in Dow 400,000 in 2060 (which will be another election year).

 

 

 

 

Written by John Divine of U.S. News & World Report

Source: U.S. News & World Report

Big Banks Shift to a New Fintech Strategy

Provided by CNBC

Big banks’ fintech investing strategies are shifting at a crucial time in the nascent industry’s development.

This year, big banks seem more eager to partner with or buyout startups challenging crucial lines of business in the financial services industry. It comes after years of banks’ simply being willing to buy in as minority stakeholders in startups. Fintech, or financial technology, is used to make financial services more efficient.

More recently, banks are committing big bucks to buyouts. It comes after a year in which fintech funding hit new highs. Ally Financial (ALLY) bought online brokerage TradeKing Group, the firm announced earlier this month, in a $275 million deal. BlackRock (BLK) also decided to tap into fintech, last August, with the $150 million acquisition of online investment firm FutureAdvisor.

Banks aren’t always spending to buy startups with big-name investors — or big price tags. When Goldman Sachs (GS) last month bought Honest Dollar, the Texas-based online retirement planning service, the startup had raised just $3 million in venture funding, according to Crunchbase. The bank didn’t disclose its purchase price and didn’t comment on the deal. TradeKing, as well, raised less than $10 million in venture funding, according to Crunchbase.

It isn’t just U.S. banks eager to beat back the rising tide of disruption. Spanish bank BBVA bought out Finnish banking startup Holvi last month, and didn’t disclose terms — it also wasn’t BBVA’s first deal in that sub-sector. BNP Paribas earlier this month announced a partnership with SmartAngels, a direct investing platform for crowdfunding deals, as well.

“Banks are partnering to keep in the game and keep relevant,” said Alvarez & Marsal managing director David Gibbons. “I think they’ve caught up fairly well.”

Finding partners, rather than M&A targets, is especially helpful to banks that have been squeezed out of some financial services businesses like small business lending. One investor, who asked to not be quoted, said many banks have a difficult time profitably originating small loans. JPMorgan Chase (JPM)partnered with On Deck Capital (ONDK), an online lender that has struggled since its late 2014 IPO, to generate loans to the bank’s customer base.

“Banks are already well down the road to partnering with marketplace platforms for unsecured lending,” said PricewaterhouseCoopers fintech co-lead Haskell Garfinkel. “The biggest challenge right now is to consume it, integrate it and monetize it.”

And while big banks are trying to integrate partners and investments, some may shut other startups out of customer accounts and financial data. In his annual letter to shareholders this month, JPMorgan Chase CEO Jamie Dimon noted unnamed third-party apps take more data than they need, and said they are “doing it for their own economic benefit.”

If banks again starts throttling apps they believe are abusing access, reverberations might have a lasting impact in Silicon Valley, where mobile banking and finance management apps are often dependent on real-time access to customers’ bank accounts. As banks sift out which businesses they must buy, which they may partner with and which they can duplicate independently, various segments of the fintech ecosystem are likely to encounter different treatment.

While financial services investors have put money into startups like MobiKwik and Square (SQ), M&A for payments-focused companies has been rare. Considering that a number of big banks banded together in February to establish the clearXchange network, which allows consumers to process transactions between smartphones without a third-party app, payments is one sub-sector of fintech that could see continuing competition from legacy players.

“It’s a race to the bottom,” said Mariano Belinky, managing partner of Santander InnoVentures, a $100 million fund operated by the Spanish bank of the same name. “We’re going to end up with payments as a free service.”

Written by Jon Marino of CNBC

(Source: MSN)

Goldman Sachs Dismissing 20 Analysts for Cheating on Tests

A screen at a trading post on the floor of the New York Stock Exchange is juxtaposed with the Goldman Sachs booth on Oct. 16.
© Richard Drew/AP

Goldman Sachs Group Inc. is dismissing about 20 analysts globally in offices including London and New York after discovering they had breached rules on internal training tests, said people familiar with the matter.

The analysts, who had been working in the investment bank’s securities division, have either already been dismissed or are in the process of leaving the bank, said the people, who asked not to be identified as the matter is private.

“This conduct was not just a clear violation of the rules, but completely inconsistent with the values we foster at the firm,” said Sebastian Howell, a Goldman Sachs spokesman in London, who said he couldn’t comment further.

Bankers throughout Wall Street often assist each other on basic training and compliance tests because these are seen as time consuming and repetitive, according to separate people with knowledge of the process. Investment banks have started taking strict measures to prevent this from happening in recent years amid increasing scrutiny from regulators.

Goldman Sachs is among the most selective employers on Wall Street. Last year, the bank hired just 3 percent of 267,000 applicants, and Chief Executive Officer Lloyd C. Blankfein has called his firm“the employer of choice in our industry.” Fortune magazine named Goldman Sachs one of the 100 best companies to work for, a citation it has received every year since the list began in 1984, according to a presentation given by Blankfein in February.

The firings come the same week that the New York-based firm reported quarterly earnings that fell short of analysts’ estimates for the first time in four years.

Written by Sofia Horta E Costa & Ruth David of Bloomberg

(Source: Bloomberg)