The other day I was talking to my friend Billy about the recent move Dow Jones made to the Industrial Average – a move, no doubt, prompted by the Supreme Court’s decision regarding the Affordable Care Act. That decision changed the Market significantly. Shortly thereafter, on July 7, 2012, I concluded in Supreme Letdown:
“The “healthcare boom” begins today – and that includes price inflation – and will continue until another major fiscal crisis erupts. Sorry to say.”
More than two months after that posting, on September 14, 2012, Dow Jones announced that is was replacing Kraft Foods with United Healthcare. I mentioned the move as it happened last week in Strength Sets All-Time High, Again – but only in the context of performance. In that blog I said,
“the Dow has been unable to produce market returns – as GDP has consistently outperformed it. That might be one reason Dow Jones announced that they are replacing Kraft Foods with United Healthcare in its Industrial Average.”
While that may be one reason for the move, and I suspect that it was, I neglected to discuss the Dow’s move in the Market context – as my friend Billy pointed out.
Dumping Kraft Foods for United Healthcare was a strategic portfolio move. As explained thoroughly in chapter 2 of my book, the Dow’s purpose and design objective is to indicate the market (GDP) in current dollars – a.k.a. Nominal GDP. But as shown in the chart below the DJIA has been consistently underperforming it. The portfolio needs more zest to achieve its objective – and what better place than an industry poised for rapid inflationary growth: Healthcare.
While I believe the Dow’s long-term trend shown here is a more accurate reading of the Market environment than Nominal GDP does, (See: Recessionary Proof for more info), Dow Jones had little choice but to adjust its portfolio to the changing Market – to more accurately indicate it. That’s its ultimate goal, after all.
As for the 15-51 Indicator, its long-term trend continues to do what it’s supposed to do – to produce above-average market returns through superior 15-51 construction; and when considering the poor conditions of Markets and money, even stock market strength should be underperforming gold – which the Indicator also continues to do. No changes to it are necessary to achieve its stated objective.
That’s another benefit to 15-51 construction; it’s more durable and requires less maintenance. That’s the stability your portfolio needs!
Nevertheless, market changes are always good times to review your asset allocations and portfolio plan – especially when stock valuations are so high.
Stay tuned — and let me know if you need help.