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What the Charts Tell Us

Partners' Network Blog

What the Charts Tell Us

The previous blog showed 10-year market performance and benchmark charts and graphs; but what are they really telling us?

The purpose of posting them is to indicate market trends over a reasonable period – such as ten years.  From a birds-eye view, they show some macro trends.  The markets, as defined by the four indexes illustrated, are trending upward, although it hasn’t been a smooth ride.  There have been some huge dips and spikes.  It also shows that the movement of these four indexes all follow the same direction, albeit with different amounts.  Possibly, what this indicates is that to share in the growth of the market, it almost doesn’t matter what you invest in as long as you are in the market with diversified across-the-board stocks.  The indexes I chose are the four most-quoted and largest indexes for their groups.  If you want to invest in these, you can with exchange traded funds or index funds.  This type of investing is considered “passive” because the goal is to duplicate the market returns as reflected in the changes in the index and not beat the market as “actively” traded funds try to do.  Passive refers to being willing to accept the market return. Over time, most of the actively managed mutual funds do not perform better than the index for that type of fund. In some years they might do much better, but over a long period, such as ten years they do not.  Also there are some funds that consistently do well, but they are in the minority.

What is also not shown are the highs and lows within each year.  The charts show the year-end amounts.  For the purposes of indicating trends, this might be sufficient, but can also be misleading.  For instance, the DJIA low point was around 6500 on March 9, 2009, yet this amount is not reflected at all in the charts since 2008 ended at 8776 and 2009 ended at 10428. However, this doesn’t change the long term trend.

Another thing the charts do not indicate are changes in the dollar amounts of dividends.  The yields are provided.  The year end 2008 DJIA yield was 3.58% and 2009 was 2.64%. This is a function of the dollar amount of dividends for that year divided by the market value of the index as of the end of the year.  When the market tanked at Dec 31, 2008, the yield went up and when the market recovered, the yield dropped.  Yet, while the dollar amount of the 2009 dividends dropped it wasn’t that great.  The 2008 dividends were $316.40 and the 2009 dividends were $277.38 which is a drop of about 12.3%.  We live off of, spend or reinvest dollars, not the yield percent and to a great extent do not really do anything with the changing prices of stocks.  This relatively small drop in dividends in view of everything else that occurred doesn’t appear to be so devastating.

The Price/Earnings (P/E) trends are clear with some major blips.  Very high P/Es for the DJIA at 2007 and S&P500 at 2009 would need some examination and explanation of the aberrant activity in certain component members.  However, the consistent P/Es before and after indicate stable earnings in relation to stock prices.  In general, the market does not like surprises and erratic profits create instability.  While employment dropped considerably in 2008/2009, corporate profits did not (possibly because of layoffs) and as profits increased stock prices rose.  Also, there appears to be a trend now toward higher dividends even among the so called growth companies causing some stock prices to rise.

Similarly, not evident is each person’s starting point.  If you started at the exact beginning of the period then the results are accurate for you.  However, no one actually starts at the dates indicated, so results vary for each of us.  Further adding or withdrawing funds during periods further skew results as do portfolio management and trading costs and taxes and the effects of having cash sit idle until invested.

There is more, but I think I made the point.  The charts and indexes provide indications of trends and should be used as a guide along with all the other available data before you make a long term investing decision.

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