The Dow Jones Industrial Index debuted 125 years ago. The index of 12 smokestack companies opened at 40.94 on the first day. Since its inception, the Dow has risen on average 7.69% per year. Over my lifetime (1944), the Dow has risen 340 times.
The index now includes not only industrials but also financials (JPM), consumer companies (KO and WMT) and technology heavyweights (MSFT and APPL). In brief, production has much less impact on the Dow than service and technology.
Investing in the Dow is not just buying a piece of paper. For the Dow reflects the world’s confidence in our blue chip companies. Everyone benefits when the companies represented in the Dow are hiring more people and producing more goods and services.
None of us has a crystal ball. Many people hold a significant percentage of their wealth in cash because they see black clouds on the horizon. However, like Warren Buffett, I am bullish on the stock market and America. Therefore, I hold little cash.
In brief, investors do not enjoy sunshine and blue skies all the time.
Let me recount some of America’s misfortunes during my lifetime. World War II, the Cold War, the Korean War, the Vietnam War, stagflation during the late 1970’s and early 1980’s, the S&L crisis, the Watergate Scandal, the OPEC oil embargo, the tech bubble in the late 1990’s, the 9/11 attack on the World Trade Center and the Pentagon, the Great Recession (2007-9) and the COVID pandemic.
We do not always experience a bull market. There have been 70 years with no record closes, including the span from 1930-53. In October 1987, the Dow plummeted 22.6%.
There are many contributing factors to the Dow’s performance. Interest rates and the health of America’s infrastructure are two major factors.
My biggest concern is the prospect of rising interest rates to combat inflation. Buffett summed up my worries when he said, “Interest rates are to the value of assets what gravity is to matter. Short-term term Treasuries are nearly nothing today. If Treasury rates are supposedly to be this low, those high-flying tech shares are bargain.” Buffett added, “(and this is one big if).”
Another red light is our outdated infrastructure. Sadly, U.S. infrastructure is both dangerously overstretched and lagging behind some of our key economic competitors such as China.
Henry Petroski explained in his book, The Road Taken: The History and Future of America’s Infrastructure, poor infrastructure can impose large costs on the U.S. economy. In addition to the threats to human safety from catastrophic failures such as, bridge collapses, dam breaches, inadequately maintained roads, trains, and waterways, it also cost billions of dollars in lost economic productivity.
Currently, there is a political impasse on the amount that America should spend on infrastructure and how to fund it. Both sides are struggling to bridge these differences.
President Joe Biden recently advocated spending $ 1 trillion on such new spending and suggested a 15% tax on corporations as opposed to increasing top-end rates. In response, key Republican leaders have increased their infrastructure proposal to $928 billion. Republicans have also pushed to pay for parts of the plan using funding from the March $1.9 trillion pandemic relief bill.
If our two major political parties can work together to pass an infrastructure bill, some of the dark clouds hanging over our economy will be lifted. Over the Dow’s 125 years, America has experienced 25 recessions. To quote Warren Buffett, “may we all live through many more recessions and come up smiling on the other side.”
Sarasota resident Ernest “Doc” Werlin spent 35 years in fixed income as a trader and corporate bond salesman, including time as a partner at MorganStanley in charge of corporate bond trading. Send suggestions and comments to email@example.com.