The Dow Jones Industrial Average (DJIA) is reported on daily by every major finance and media platform—a testament to its importance and relevance in global financial markets. The market benchmark has a rich history embedded alongside America’s rise as a global superpower in the 20th century, and the inflows and outflows of companies on the 30 stock index coincide with broader secular trends. For example, the delisting of many industrial stocks over time encapsulates America’s transition towards a service-based economy. Meanwhile, the addition of tech companies in the last few decades paints a similar picture of change. Today’s infographic looks at Dow data spanning over nine decades, all the way back to the tail end of the Roaring Twenties.
Crank Up The Volatility
An increasingly competitive and accelerating business landscape results in greater churn for stock market indices. In fact, in the 92 years of activity visualized for the DJIA, there were 93 changes in its composition. This is not surprising, as the average duration of a company’s tenure on American indices has been trending down for decades—that said, 63% of Dow changes occurred in the second half of the 92 year sample period. The current iteration of the DJIA includes some long-serving constituents, with the average length of companies in the index sitting at 20 years. General Electric was the last standing member of the original group from 1928, but in 2018, they were replaced by Walgreens. 2020 has also brought with it some fresh faces, including three changes so far. They include Salesforce for ExxonMobil, Amgen for Pfizer, and Honeywell International for United Technologies. Here’s a full list of the current companies in the index: Although all the stocks in the DJIA are intended to be in line with broader economic trends, the similarities end there. For some DJIA stocks, 2020 has brought growth and opportunity—for others, quite the opposite. YTD stock price performances range vastly from a high of 55% to a low of -49%. Perhaps it serves as no surprise that the best performing companies serve in the tech space like Apple, Microsoft, and Salesforce, while the worst performing are the likes of Boeing and Chevron.
A Sign of the Times
The three changes in 2020 can best be described as modernizing the Dow. The delistings include businesses in industries such as Aerospace & Defense and Big Pharma. But the most monumental exit? ExxonMobil, which was once the biggest company by market capitalization in America. Their fall from grace best symbolizes the state and direction the world is headed towards. on Last year, stock and bond returns tumbled after the Federal Reserve hiked interest rates at the fastest speed in 40 years. It was the first time in decades that both asset classes posted negative annual investment returns in tandem. Over four decades, this has happened 2.4% of the time across any 12-month rolling period. To look at how various stock and bond asset allocations have performed over history—and their broader correlations—the above graphic charts their best, worst, and average returns, using data from Vanguard.
How Has Asset Allocation Impacted Returns?
Based on data between 1926 and 2019, the table below looks at the spectrum of market returns of different asset allocations:
We can see that a portfolio made entirely of stocks returned 10.3% on average, the highest across all asset allocations. Of course, this came with wider return variance, hitting an annual low of -43% and a high of 54%.
A traditional 60/40 portfolio—which has lost its luster in recent years as low interest rates have led to lower bond returns—saw an average historical return of 8.8%. As interest rates have climbed in recent years, this may widen its appeal once again as bond returns may rise.
Meanwhile, a 100% bond portfolio averaged 5.3% in annual returns over the period. Bonds typically serve as a hedge against portfolio losses thanks to their typically negative historical correlation to stocks.
A Closer Look at Historical Correlations
To understand how 2022 was an outlier in terms of asset correlations we can look at the graphic below:
The last time stocks and bonds moved together in a negative direction was in 1969. At the time, inflation was accelerating and the Fed was hiking interest rates to cool rising costs. In fact, historically, when inflation surges, stocks and bonds have often moved in similar directions. Underscoring this divergence is real interest rate volatility. When real interest rates are a driving force in the market, as we have seen in the last year, it hurts both stock and bond returns. This is because higher interest rates can reduce the future cash flows of these investments. Adding another layer is the level of risk appetite among investors. When the economic outlook is uncertain and interest rate volatility is high, investors are more likely to take risk off their portfolios and demand higher returns for taking on higher risk. This can push down equity and bond prices. On the other hand, if the economic outlook is positive, investors may be willing to take on more risk, in turn potentially boosting equity prices.
Current Investment Returns in Context
Today, financial markets are seeing sharp swings as the ripple effects of higher interest rates are sinking in. For investors, historical data provides insight on long-term asset allocation trends. Over the last century, cycles of high interest rates have come and gone. Both equity and bond investment returns have been resilient for investors who stay the course.
