Forget the Dow; watch the S&P 500

It's grand that the Dow has hit new records, but many market experts see a new high for the S&P 500 confirming the rally's strength. Maybe they're right.

By Charley Blaine Mar 6, 2013 7:31PM
© Adam Gault, OJO Images, Getty ImagesNow that the Dow Jones Industrial Average ($INDU) has broken its 2007 record, the big question is when will the Standard & Poor's 500 Index ($INX) push to new highs.

The betting is soon, and there's chatter that a new high for the index means the four-year bull rally will continue.

It did not happen on Wednesday. The S&P 500 closed up 2 points to 1,541 but is still 24 points below its 2007 peak close of 1,565.15. The Dow was up 42 points to 14,296, a new closing high; it also set a new intraday high of 14,320.65. The Nasdaq Composite Index ($COMPX) slipped 2 points to 3,222.

It makes sense that the S&P would give analysts optimism. The obvious reason is the Dow consists of just 30 stocks; the S&P 500 includes 500 stocks and represents roughly 75% of the entire U.S. stock market capitalization.

Among its members are Apple (AAPL), Google (GOOG), Amazon.com (AMZN), Macy's (M), Kroger (KR), Costco Wholesale (COST) and Ford Motor (F). All are among the largest U.S. companies by revenue.

Plus, many money managers watch the index obsessively because they lose assets -- and jobs -- if their investment decisions and results don't beat the index. The largest exchange-traded fund is the SPDR S&P 500 (SPY) fund, which tracks the S&P 500.

But the S&P 500's history since 2000 might want to give some investors at least a little pause.

On March 24, 2000, the S&P 500 closed at what was then an all-time high of 1,527.46. It fell for the next two-plus years before bottoming in October 2002 -- as the U.S. stock market was crushed by the dot-com bust and then the aftermath of the Sept. 11, 2011 terror attacks.

The index didn't top its 2000 high until Sept. 27, 2007. Eight sessions later, it peaked and fell 57% over the next 17 months.

Market bulls will say that the Dow offers a different scenario for stocks.

The Dow's new record has been built on low U.S. interest rates, rising profits among most of the Dow companies -- all big multinationals -- and continued cost-cutting that has limited employment growth in their U.S. operations.  The Dow's big run has nonetheless cheered analysts, many of whom believe it suggests the rally has another year or so to run.

That's because the Dow broke its 2000 record close in August 2006 and moved 3,000 points higher over the next 12 months.

Moreover, Dow theory supports the idea of a stronger market ahead. Dow theory says new highs for the Dow industrials and the Dow Jones Transportation Average ($DJT) are signals the market could move higher.

The difference between 2013 and 2007 is the problems that were going to smash the stock market were emerging: a bursting real estate bubble, jumping oil prices that would weigh on consumer spending and a collapse of the domestic auto industry.

Fast forward to 2013. Oil prices may have peaked for the year. (OK, Iran is still a big question mark.) There isn't a real estate bubble, and the automobile industry isn't on the verge of falling apart. There are worries about job growth, however, and about the effects of austerity on public-sector employment -- as well as continuing fears about economic health in Europe and, maybe, Asia.

A bonus thought:
While all but one Dow stock is now higher than it was at the market bottom in March 2009, 18 Dow stocks are currently higher than they were on Oct. 9, 2007, at the last Dow peak.

That total assumes UnitedHealth (UNH), Cisco Systems (CSCO) and Travelers (TRV) were members of the Dow in 2007.

General Motors (GM), which went into Chapter 11 bankruptcy protection in 2009, was a Dow component. So were Citigroup (C) and American International Group (AIG). All three were casualties of the financial crisis.

Home Depot (HD) is the Dow's best performer since the 2007 market peak, up 108.5%. IBM (IBM) is up about 75%, and it contributed 678 points to the index over that time.

Alcoa (AA) is the laggard, down 79%, followed by Bank of America (BAC), down 78%, and Hewlett-Packard (HPQ), down 62%.

Here's how the current Dow components have done since 2007.

Points gained by Dow components since 2007 peak
Company

Tues. close

Chg. From 2007 Dow peak

Points contributed to Dow 
IBM

$206.53

74.58%

677.57
McDonald's

$95.81

66.97%

295.12
Home Depot

$70.47

108.49%

281.61
Wal-Mart Stores

$73.72

63.06%

218.94
Travelers Companies 

$81.00

51.97%

212.72
Chevron

$117.93

27.08%

192.99
Walt Disney Co. 

$56.48

59.32%

161.50
Johnson & Johnson 

$77.66

17.22%

87.62
United Technologies

$91.02

12.09%

75.41
Coca-Cola

$38.68

33.66%

74.80
3M

$104.45

9.23%

67.81
Caterpillar

$90.21

9.33%

59.13
Procter & Gamble

$77.05

8.40%

45.85
UnitedHealth Group

$53.50

10.33%

38.47
Pfizer

$28.07

9.91%

19.43
Verizon Communications

$47.69

4.54%

15.90
JPMorgan Chase

$49.49

4.04%

14.74
American Express

$64.12

2.56%

12.29
DuPont    

$48.68

-1.62%

-6.14
Microsoft

$28.35

-5.81%

-13.44
Exxon Mobil

$89.61

-3.30%

-23.50
Intel

$21.51

-16.76%

-33.25
AT&T

$36.60

-12.82%

-41.32
Merck

$43.25

-19.35%

-79.71
Cisco Systems

$21.22

-35.86%

-91.09
General Electric

$23.59

-43.86%

-141.53
Boeing

$78.66

-22.46%

-175.02
Alcoa  

$8.35

-78.98%

-240.91
Hewlett-Packard

$20.37

-61.17%

-246.44
Bank of America 

$11.55

-78.03%

-315.01

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5Comments
Mar 7, 2013 12:59PM
avatar
Charlie has a very good point. Remember the DJ is a price weighted index. It only takes 4 or 5 large cap companies to make a huge impact on the index.
Mar 7, 2013 11:07AM
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My model is built on the S&P index! -

Mar 7, 2013 9:02AM
avatar
A new plateau in the making  !!!   The best is yet to come. !!!
Mar 6, 2013 11:11PM
avatar

Not only the S&P 500, but also watching the RUT2K...Or, aka, Russel 2000.

 

Between the two, you can get a wde heartbeat of the markets...

 

The Wilshire is another, but gets confusing with the components..

Mar 7, 2013 1:38PM
avatar
I'm not smart enough nor "brave" enough to trade on individual stocks, instead trusting in mutual fund managers.  The funds I'm invested in are most closely tied to the S&P, Russell and NASDAQ.  Woohoo for the Dow but when will the NASDAQ flirt with it's previous records again?  I think it's all time high was in excess of 5,000 pts.  Current is still about 35% off that mark.
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