FTSE v Dow Jones

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 Michael Hood 04 Jan 2022

Basic economics question (I presume)...

Over the last few years the FTSE 100 hasn't changed much, it's till in the 7,000s.

Meanwhile the Dow Jones has increased by a significant amount.

Does this mean our standard of living has stayed the same and the american's has shot through the roof and if not, what if anything does the contrast between the two signify.

P.S. please use simple terms, I can still remember some maths but of economics terms I know nothing.

 dread-i 04 Jan 2022
In reply to Michael Hood:

Lots of big American companies drive their indexes. Apple are on the DJ at around $3 trillion in valuation. Microsoft, Cisco and lots of other global names are there. I dont think we have many with that kind of clout.

A better comparison, might be with our European neighbours.

https://www.wsj.com/market-data/quotes/index/XX/XSTX/SXXP/advanced-chart

(Add the ftse100 and Dow)

Over 5 years Europe has grown 36%, UK 5%, with the Dow at 10%.

Its left as an exercise for the reader to compare with the NASDAQ.

 AJM 04 Jan 2022
In reply to Michael Hood:

The ftse100 bears almost no relation to UK standard of living - most of the companies in it are large multinationals who make most of their money abroad. It's got a fairly weak link to the UK economy. 

In reply to Michael Hood:

It’s tech exposure mostly.

The DoW is c.25% tech (apple, ect) and the FTSE is c.2%.

Most of the growth in US stock markets has come from tech, mostly the FANGs.

Edit: whether the valuations are correct is a whole different matter.

Post edited at 19:01
 neilh 04 Jan 2022
In reply to Michael Hood:

It’s because a lot of pension funds in the U.K. go for dividend payments instead of growth.  This skewers the FTSE and makes it look anemic( which it now is)

Any reasonable investor going for growth does not rely on the FTSE.Go elsewhere.  

it’s a sad reflection on the  state of the U.K. economy   

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 MG 04 Jan 2022
In reply to neilh:.  

> it’s a sad reflection on the  state of the U.K. economy   

Is it? Arent FTSE100.companies substantially global? Isnt it a combination of the  nature of their businesses and the as you say a bias  to dividends. (Total returns would be a better comparison. )

In reply to neilh:

> It’s because a lot of pension funds in the U.K. go for dividend payments instead of growth.  This skewers the FTSE and makes it look anemic( which it now is)

> Any reasonable investor going for growth does not rely on the FTSE.Go elsewhere.  

> it’s a sad reflection on the  state of the U.K. economy   

 

Very much disagree. The DOW’a growth has been driven by apple (and Tesla). Tech heavy, high growth stocks.

The heavyweights of the FTSE are supermassive FMCG businesses (Unilever, RB ect) and global banks.

I know what I’d rather be exposed to as an investor. 

No one is ever going to over value Unilever and claim it’s worth 100x current earnings, plus you get a modest dividend every year.

Whether we need to relax listing rules in the UK to attract higher growth tech companies is a discussion that will bore most people, but it’s hard to get a listing here. Possibly a good thing, maybe (absolutely not) a bad thing.

 PaulW 04 Jan 2022
In reply to Michael Hood:

If you don't think the stock market is representative then compare the value of the dollar, euro and pound over the years. That gives a good idea of the comparative value of the country.

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 Tyler 04 Jan 2022
In reply to Michael Hood:

Also a huge slice of the corporation tax cuts from 2017 were ploughed into share buy backs which gave the Dow an additional fillip.

 neilh 04 Jan 2022
In reply to VSisjustascramble:

If you look at the performance of FTSE compared with other stock markets it’s not really very good. 

There is a lot of concern amongst the financial press that it’s had it’s hay day.

try reading articles in the economist for example. Been rumbling on for a couple of years this one . in a way it’s old news .

The introduction of dual shares may help . 
 

of course as a sensible investor you mix it up globally so you are not tied to the fortunes of one specific market   That is probably the biggest lesson  

Post edited at 21:33
 Toerag 04 Jan 2022
In reply to Michael Hood:

Dow = tech stocks. Lockdowns = tech stocks going bonkers.

OP Michael Hood 05 Jan 2022
In reply to thread:

Thanks for the replies, it seems like the main thing I did was make a false equivalence, not comparing like for like.

At least I've learnt something 😁

 ChrisVDiff 05 Jan 2022
In reply to Michael Hood:

Most companies that make up the FTSE100 index are focused on returning dividends. 
The Dow Jones however has a lot of companies focused on growth, tech companies for example.

It's also important to remember that these indexes just give you the value of a collection of shares over time, but the composition of that collection is also changing all the time and is somewhat arbitrary. Shares get listed other get de-listed all the time. 

The value of the index over time is therefore not very representative of the economy in the long term

Post edited at 08:07
In reply to ChrisVDiff:

> Most companies that make up the FTSE100 index are focused on returning dividends. 

Indeed, and most major pension funds use it for steady growth over time. Unilever isnt going anywhere fast but dont expect decent returns in the short run. Im happy with that.

> The Dow Jones however has a lot of companies focused on growth, tech companies for example.

I speculate a bit on nasdaq and tech stocks and have made a bit in the last 18 months. Im also 20% down on another investment over the last 3 months. 

 yorkshire_lad2 05 Jan 2022
In reply to Michael Hood:

As others have pointed out, the FTSE100 favours dividends.

The DJ is not geared towards dividends, but aims for capital growth (another reason for this is, apparently, that US investors prefer their return from capital, not dividends, due to tax treatment of dividends).

If you invest, you (hopefully) get some capital return (an increase in the share price), and some income return (dividend, hopefully!).  It varies (due to many factors, including tax treatment) whether you want your return (more or less) from income or capital, or a mix thereof.

 duchessofmalfi 05 Jan 2022
In reply to Michael Hood:

When you compare one ponzi scheme with another ponzi scheme what do you get?

5
In reply to duchessofmalfi:

In way is the stock market a Ponzi scheme?

 neilh 05 Jan 2022
In reply to yorkshire_lad2:

And over the last few years you would have made a killing on the DOW and very mediocre on FTSE.The difference is stunning, we are talking serious money here.

 elsewhere 05 Jan 2022
In reply to VSisjustascramble:

> In way is the stock market a Ponzi scheme?

A stock market, farmers market, gold market, used car market or any other market requires buyers for sellers to get paid but an ordinary market of buyers & sellers is not a Ponzi scheme. 

Post edited at 12:40
 duchessofmalfi 05 Jan 2022
In reply to elsewhere:

The question is does the increase represent real value or just puff? either way feel free to bet your life savings on it.

4
 elsewhere 05 Jan 2022
In reply to duchessofmalfi:

> The question is does the increase represent real value or just puff? 

An eternal question because we are no wiser than our ancestors.

https://en.wikipedia.org/wiki/Tulip_mania

 MG 05 Jan 2022
In reply to duchessofmalfi:

> The question is does the increase represent real value or just puff?

Well yes., but overall it there is clearly more value in the world than 10, 20 50, 100 etc years ago, so to date it hasn't been all been puff.  Whether any one bit is, is a matter of judgement.

2
 Max.shepherd 05 Jan 2022
In reply to Michael Hood:

Also worth noting that the Dow Jones is a price weighted index (ie doesn't take into account market capitalisation) so isn't really a particularly meaningful thing to compare to the FTSE 100. 

That being said the S and P 500 is also up 25% YoY so it's an even starker comparison.

 Forest Dump 06 Jan 2022
In reply to MG:

Debatable! To paraphrase Mastercard, a functioning eco-system? Priceless

 StuPoo2 07 Jan 2022
In reply to Michael Hood:

> Over the last few years the FTSE 100 hasn't changed much, it's till in the 7,000s.  Meanwhile the Dow Jones has increased by a significant amount.  Does this mean our standard of living has stayed the same and the american's has shot through the roof and if not, what if anything does the contrast between the two signify.

It's a good question.  I'll try try and add some details to the topic of indexes.

As others have rightly said - ANS= no.

Crux of this is to ask a couple of questions:

  1. "what is an index?"   
  2. "what does an index tell you?"  

Typically - an index might be defined as : a method to track a group of assets in a standardized way that is intended to replicate a certain area of the market.  (very much a finance focused definition)

In short an index can be literally anything you want it to be and it can tell you anything you want it to tell you.  Unless explicitly designed to mimic the UK economy - it will not.  The ftse100 is not an index that is designed to replicate the performance of the UK economy.  

Indexes are famously used to track assets in the financial markets but they can just as easily track inflation, farm feed, manufacturing output, elections ... you name it.

Index's are being created and destroyed constantly.  Some index's have survived the test of time - presumably because they have provided value (ftse, S&P, DJI etc) - others have died away.  Some Fund Managers famously benchmark the performance of their funds against their own custom indexes ... which miraculously always show how well they out perform each year! (Quite amazing how they get away with that one!  Watch how fund managers change the benchmark over the years so that they're always out performing something!)

The ftse100 is the index of the leading 100 companies on the London Stock exchange ... so the question is "what does tracking the leading 100 companies on the london stock exchange tell you?"  Well .. 1x thing is doesn't tell you is "how is the UK economy doing?".

If you were a stock market investor focused solely on the London Stock Exchange you might want to know "is the London stock market, on the whole, rising or falling today?  i.e. if I buy now - am I buying into a rising market or a falling market?"  Counter intuitively ... that doesn't have a lot to do with the state of the UK economy on that exact same day and certainly doesn't tell you WHAT to buy in the market either.  If investors are buying (who cares what's happening in the economy) the stock prices will rise and you might expect the index to rise too.  If investors are selling (and they sell for all manor of reason) the stock prices will fall and you might expect the index to fall too.  To a certain extent .. the moving average of the index is a very broad brush starting answer to the question "is it a good time to buy into or sell out of the market right now?".

People buy and sell for all number of reasons.  The FTSE 100 crashed in Feb 2020 as a result of Covid long before the UK companies had made their Q1 reporting deadlines which inevitably showed little hit in Q1.  Similarly .. the FTSE 100 started its bounce back hard as soon as it became apparent that the world was not going to end.  In Feb 2020 the ftse sold off ~30% .. does that mean the UK economy was down ~30% at that time - no it does not.  It only means that investors on the LSE went to cash - they sold their shares in companies listed on the LSE because of fear.  Fear of the unknown and fear that the pandemic might make a lasting impact on the long term profitability of the companies in which they were invested.    Good timing .. but as of Jan 2022 the ftse is basically back exactly where it was before the covid pandemic market crash.  To hammer it home though - does that mean that the UK economy is back where it was pre-covid?  ANS = evidently it is not.

One thing to think about:  An index is often a straight forward average of its constituents (but it need not be - it can be defined any which way the index creator defined it to work) and averages literally tell us .. the average.  If there are a couple of enormous members - they will start to drag the index around with them.  This can cause confusion if you not clear on what the index is telling you.  

Example:  The S&P500, the index of 500 leading companies listed on any US stock exchange (note - I didn't say 500 largest - S&P decide the constituents of this index themselves), returned +24% last year - a great year!  But 1/3 of that 24%... came from the gains of just 5 stocks - 5 of the biggest.  Microsoft, Navidia, Apple, Alphabet (Google) and Tesla i.e. big tech.  That tells us two things 1) Big tech had a good year last year and that if they have a good year again this year then we can expect the S&P500 index to return a good year too and 2) not everyone is doing as well as big tech.  In fact ... most companies didn't do anywhere near as good as big tech in 2021! (Mind you ... looking a bit choppy right now for big tech!!!!)

I give this example to underscore the need to understand what an index is telling you and to demonstrate that what indexes are telling you can and will change over time.

https://www.wsj.com/articles/five-big-tech-stocks-are-driving-markets-that-...

Now .. there is a number of attempts to create some type of standard of living index.  All have the exact same caveats as above - you need to read the details to find out exactly who created them, why, with what motive and what they are telling you.

  1. https://www.oecdbetterlifeindex.org/
  2. http://hdr.undp.org/en/content/human-development-index-hdi
  3. https://www.economist.com/media/pdf/quality_of_life.pdf

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