There was a flurry of positive news at the end of July which drove the markets up. The most-quoted indices are all at or near their 2009 highs.
First, several banks and large companies such as Intel Corp., Caterpillar Inc. and Apple, Inc., reported impressive quarterly profits outpacing expectations. Then came news that existing-home sales in June rose to a seasonally adjusted annual rate of 4.89 million, with sales up in all four regions of the country.
The share of foreclosures on the market has shrunk to about one-third of available homes, down from nearly 50 percent earlier in the year. There are still 3.8 million homes for sale, a 9.4-month supply at today’s sales pace — but that’s edging closer to the seven-month supply at which point the market should begin to stabilize, according to the National Association of Realtors. For three straight months, prices have risen in about half of the nation’s 55 major metropolitan areas.
But don’t overlook the negative news. Mortgage rates have risen, with a 30-year fixed-rate mortgage averaging 5.25 percent, above the record low of 4.78 percent earlier in the year. Jobless claims rose too. Experts claim the trend is stabilizing, and consumer sentiment readings showed a dip in July, the University of Michigan and Reuters reported, disappointing those who had expected a slight lift. Even if a recovery is under way, it will be slow, running under a caution flag for some time to come.
There are three ingredients in the good life; learning, earning and yearning.
Christopher Morley, American Author (1890-1957)
With all the buzz about stock indices hitting their highs of the year, it seems like a good time to focus on the actual indices. The Dow Jones Industrial Average is the most widely recognized market indicator, but what exactly is it?
Dow Jones Industrial Average uses 30 well-known stocks each representing a different industry to provide a benchmark for comparing individual stocks with the course of the market.
It was first published in 1896 with 12 stocks. Since that time all but one — General Electric - have been replaced. These stocks are carefully selected by the managing editors of the Dow Jones & Company-owned newspaper, The Wall Street Journal.
The Dow is calculated with a special divisor other than the number of stocks, to avoid distortions when constituent companies split their shares or when one stock is substituted for another.
While the Dow is the index most often quoted, no single index can tell us everything we need to know about the stock market. Numerous indexes have been developed to track other aspects of the market. This list provides some insight into different benchmarks used today.
Market indexes or benchmarks
Standard & Poor’s 500 Index covers 500 large-company stocks that account for approximately 80 percent of the total U.S. stock market value. This calculation gives more weight to stocks that have greater influence on the market. The S&P 500 is the index used by most professionals as a benchmark for U.S. large-cap equity investments. It is composed of industrial stocks, transportation stocks, utilities, and financial institutions.
The Wilshire 5000 represents over 7000 U.S.-based companies, all publicly traded stocks in the United States. It measures the broad market.
The Russell 2000 offers a comparison of the smallest two-thirds of the 3,000 largest U.S. public companies.
In 1969, the Europe, Australia, and Far East (EAFE) index was created as a measure of international securities markets. It provides an indication of how a portfolio consisting of companies outside the United States might perform over time. It is probably the most well-known measure of international markets.
So why do stock prices fluctuate?
If you are familiar with the stock market, you know that prices change throughout the day. But you may not understand how or why the prices fluctuate. Share prices change because of supply and demand. If more investors want to purchase a stock, the price is raised. But if more investors want to sell a stock, then prices fall. Company earnings reports, economic conditions, investor sentiment and other related factors generally fuel supply and demand activity.
It all goes back to the simple economic principle of supply and demand. Increasing demand causes prices to rise. Decreasing demand causes prices to fall when all else remains the same.
Applying these concepts to everyday situations may help to understand the stock market. The goal is to demystify the markets making you an informed and educated investor.
Darcie Guerin, Financial Advisor & Branch Manager, Raymond James & Associates, Inc. located at 606 Bald Eagle Drive, Suite 401, Marco Island, and FL 34145 provides this article. Gulfshore Life magazine named Guerin as one of the Best Personal Wealth Managers in The Southwest Florida Area for 2009. If you have questions please contact Darcie Guerin via e-mail at Darcie.Guerin@RaymondJames.com. Phone 389-1041, toll free (866) 343-0882 or at RaymondJames.com/Darcie. Past performance may not be indicative of future results.