Forum

Look for Opportunities, Not Necessarily Perfect Timing

Moises Ospina

Senior Advisor, Capital Markets

Feb 16, 2017

Success in investing is about identifying opportunities rather than timing the markets.

The Dow Jones recently crossed the 20,000 level, which was exciting news for investors and others in the financial services industry. At the end of the day, however, this is just a number — the underlying factors and valuations will determine where we go from here.

It’s important to know and understand history — while it won’t necessarily predict the future of the Dow, it will help investors make decisions based on facts. The following information also reflects that financial planning and long-term investing should continue to be part of the conversations between advisors and clients.

The Dow Jones index closed at a humble 40.94 level on its first trading day on May 26, 1896. It took nearly 10 years for the Dow to reach the first milestone of 100 on Jan. 12, 1906. The economy was different back then, as companies weren’t growing nearly as rapidly as in our current society, and the larger companies (e.g., Distilling & Cattle Feeding and Tennessee Coal & Iron) were obscure names in the commodities sector.

The Dow 100 level was an exciting milestone, but investors didn’t expect that it would take 36 years for the Dow to climb above 100 for good. It was not until May 27, 1942, that the Dow closed at 101.09 — meaning the index merely returned 0.8 percent in 36 years.

The next milestone was the 1,000 mark, which the Dow reached on Nov. 14, 1972, at 1,003.16. The index returned nearly 892 percent in three decades from May 1942 to the end of 1972 — nearly a tenfold increase.

Dow Jones Index Pricing History

Trends and various factors outside of the markets have also historically proven to have significant impacts on the Dow. The oil crisis began in October 1973 when the members of the OPEC countries proclaimed the oil embargo, and the price of the commodity went from $3 dollars a barrel to $12 dollars a barrel. The Dow Jones fell 45 percent, and it was not until December 1982 that the Dow closed at 1,011.15, returning only 0.8 percent for the entire decade.

How we can forget the next milestone? In March 1999, the Dow closed at 10,006 near the height of the “anything.com” era, better known as the dot-com bubble. The index returned 889 percent from 1982 to March 1999, another tenfold return. It took the Dow eight years to leave the 10,000 milestone, returning 1.4 percent between 1999 and 2010.

So what’s next? The key is recognizing that innovation is happening now and will change the future. It is also time to identify with your advisor what industries, sectors and companies are driving innovation. It’s very possible that, in the future, we’ll look back at the 20,000 Dow, and it will seem like another blip on the radar.

The 20,000 Dow also illustrates that stocks and investments are long-term tactics. Can anyone imagine how the Dow Jones sounded back in 1999 with the dot-com bubble or the financial meltdown in 2008?

It’s important to remember that the Dow Jones is also a narrow index, so following an index like the S&P 500, which covers a wider and more diverse range, to confirm the overall health of earnings is a wise idea, as well. The following information shows the one-year percentage change from multiple sectors in the U.S. economy.

The chart above shows that the materials (38.82 percent), financials (37.41 percent) and energy (31.74 percent) sectors have shown the best one-year performances, as of Jan. 27, 2017.

The energy sector is benefiting from what seems to be a more stable market — the West Texas Intermediate (WTI) oil barrel has been trading in the $51–54 range since Dec. 7, 2016. In the financials sector, U.S. banks are doing particularly well due to potential deregulation from the new administration and a possible faster pace of increases of interest rates from the Fed.

Timing the markets is virtually impossible, and the historic data on the Dow Jones index is a perfect example. In addition, the more recent comeback in some energy, metals and mining companies was not widely anticipated in the investment community.

Innovation

The U.S. economy is in better shape than other economies around the world. It’s important to focus on the opportunities we have as a country and as a society. While focusing on the next level the Dow hits is of interest, it should not be the priority for long-term investors.

Innovation is the key to transforming business fundamentals across a broad spectrum of industries — from manufacturing to agriculture, energy and finance to healthcare. Traditional industries are noticing a significant shift to information technology, data, algorithms and smart analytics, which will likely result in a change of how value and profit are created.1

Value and profit creation will determine the future levels of the Dow Jones and other indices, but identifying the companies, sectors and industries that will thrive through innovation is not an easy task.

Finding such opportunities requires teamwork, and it’s imperative for investors to have these conversations with their advisors and financial professionals to determine the future steps that should be included in their financial pictures.

 

1 Innovation Summit 2017, The Economist.

 

 

All opinions expressed and data provided are subject to change without notice.

Some of these opinions may not be appropriate to every investor.

Index performance does not reflect the deduction of any investment-related fees and expenses. It is not possible to invest directly in an index.

Asset allocation/diversification of your overall investment portfolio does not assure a profit or protect against a loss in declining markets.

Dow Jones Industrial Average is unmanaged and measures broad market performance. It is not possible to invest directly in an index.

Securities offered through 1st Global Capital Corp. Member FINRA, SIPC. Investment advisory services offered through 1st Global Advisors, Inc.

 

Moises Ospina is the senior advisor for the Capital Markets Group at 1st Global. In this role, he applies his years of market expertise as he works with affiliated advisors to perform account analysis as well as construct and manage fixed-income portfolios

Want to read more from 1st Global? Follow us on Twitter @1stGlobal or on LinkedIn. You can also watch videos on the company’s YouTube Channel.

1st Global Capital Corp. is a member of FINRA and SIPC and is headquartered at 12750 Merit Drive, Suite 1200, in Dallas, Texas 75251; 214-294-5000. Additional information about 1st Global is available at www.1stGlobal.com.


image description

Partner with 1st Global

If your firm is committed to being a high performance market dominator, we want to learn more about you and determine if there is a fit with our services. As a leading CPA firm growth consultant, we enable qualified firms to create long-term, profitable growth.