It was 1884 when journalist Charles Dow and his statistician buddy Edward Jones published their first stock average – what we now call the Dow Jones Transportation Average – in the Customer’s Afternoon Letter – what we now know as The Wall Street Journal. Two years later, the boys calculated their first average purely of industrial stocks, creating what is now known as the Dow Jones Industrial Average.

When it was first published, the DJIA stood at 62.76

Back in the day, the iconic duo would simply add the closing prices of their index’s components and divide by the number of components, producing, in other words, a price-weighted average. Today’s Dow, with the addition of its famous divisor (0.14602128057775 for those keeping score), does essentially the same thing. And that gives today’s higher-priced stocks more influence than their lower-priced counterparts. Why? Because a $1 move in the smallest component of the DJIA has the same effect as a $1 move in the largest component of the average.

In today’s Dow, every one dollar change in price in a component stock equates to a 6.87-point move in the average

Thus, it happens that in the first 10 months of 2016, just five stocks – none named Apple – have been responsible for an outsized 81% of the blue-chip average’s gains. Indeed, UnitedHealth, Caterpillar, IBM, Chevron, and 3M Co. each contributed more than 100 points to the DJIA’s 700-plus point gain.

Healthcare, the year’s worst-performing sector in the cap-weighted S&P 500, includes the Dow’s biggest point contributor

It’s no accident that these five stocks collectively yield a full basis point more than the S&P 500. The only accident is that they’re among the Dow’s most high-priced components. Can’t imagine Messrs. Dow or Jones saw this one coming.

 What the markets have been doing…

Amid all the political hoopla, maybe because of it, stocks of all persuasion drifted lower across the period. Nothing catastrophic to be sure, but down nonetheless. By Friday, the S&P 500 had recorded its ninth consecutive daily decline – the big benchmark’s longest losing streak since 1980 The somewhat irrational environment weighed especially on the NASDAQ’s fast-growing and highly valued technology and Internet-related companies.

In the real world, the period’s economic data were generally positive. Personal income and consumer spending both recorded healthy gains in September, and a gauge of manufacturing activity remained in expansion territory and rose slightly. On the Fed front, the committee decided to keep rates steady, as was widely expected.

 

Index Friday’s Close Two-Week Point Change Year-to-Date Change
DJIA 17888.28 -(257.43) +2.66%
S&P 500 2085.18 -(55.98) +2.02%
NASDAQ 5046.37 -(211.03) +0.78%

After reaching a five-month peak earlier, longer-term Treasury yields retreated a bit toward period end, pushing prices slightly higher. In the investment-grade corporate space, traders appeared to pare back risk exposure due to concerns about falling oil prices and election results while the high yield crowd remained relatively quiet. Municipal bonds also posted generally positive returns but lagged Treasuries.

 

Fixed Income Yield Two-Week Yield Change
2-Year Treasury
0.82%
-(0.02)%
10-Year Treasury 1.81% +0.05%
30-Year Treasury 2.59% +0.07%
30-Year Municipal Bonds 2.57% NC


Quote of the Week…

“No one wants to see a diet Twinkie.”

 Bill Toler, chief executive of Hostess Brands, on the key to the 86-year-old company’s revival

Number(s) of the Week…

5% to 10%

The expected drop in Wall Street bonuses this year compared to last year

What Fund Architects has been doing…

Between politics and rising interest rates, we’re not at all surprised to see uncertainty in the markets on the rise. Which typically means there are good investment opportunities if you can identify them. It’s very much times like these make us glad to have a systematic process.

Equity Rankings

For a third straight month, Global Technology (IXN) is the top sector in our rankings. Since adding the position in September, the position has nicely outperformed the broader market. In November, we will also have exposure to Global Financials (IXG). The financial sector has benefited from a recent rise in interest rates, and the sector is relatively cheap with many firms still trading at discounts to book value.

Fixed Income Rankings

Also for a third straight month, Convertible Bonds (CWB) is the top ranked fixed income sector in our rankings. Convertible bonds have been providing strong risk adjusted returns, and still yield more than 5% annually. For November, we booked a decent gain in our Emerging Market Sovereign Debt position and used the proceeds to purchase Senior Bank Loans (BKLN). Since the interest rate on bank loans resets often, this sector has very little exposure to changes in interest rates. As long as credit spreads don’t widen, we expect pick up a nice return.


The views in this commentary are those of Fund Architects. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this commentary, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from Fund Architects or any other investment professional.  The information contained within this commentary should not be the sole determining factor for making investment decisions. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, you are encouraged to consult with Fund Architects. Information pertaining to Fund Architects advisory operations, services, and fees is set forth in Fund Architect current disclosure statement, a copy of which is available upon request. Fund Architects, LLC is an SEC Registered Investment Advisory Firm.

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