Since 1928, the Dow Jones has consisted of 30 companies. Unlike its origins, today's "Industrial" portion of its name mainly holds tradition, with companies in the field of finance, retail, pharmaceuticals, and food bearing a larger portion of the Dow. These companies include Bank of America, Wal-Mart, Pfizer, and McDonald's, better representing today's current composition of the American economy. They can be found in the heart of down towns of metropolitan cities, in strip malls of suburban neighbourhoods, and concentrated commercial areas of small towns. The American economy has grown well beyond its industrial roots, focusing heavily on services and consumer goods, now the biggest driver of American GDP.
But over the past two years, America has struggled to emerge out of a economic hardship, dare I say recession? Meanwhile, the Dow Jones and other American financial instruments have soared since the financial crisis of 2008 that triggered a near collapse of the American empire. And why? Low interest rates and a dropping US currency has helped add to boost the value of many investment vehicles, but the bulk of the growth in the market is the continued global expansion of the 30.
Companies like McDonald's, Wal-Mart, Coca-Cola, Hewlett-Packard began expanding to the Far East more than a decade ago, and investments in Asia, mainly China, are starting to pay off. China continues to develop economically at double digit growth, very similar to the early 1900's of the United States, as well as Canada. But the major difference is that China had 1.2 billion people at the turn of the century when it was becoming a more capitalist country, and Canada and the United States had less than 1/10th of that, roughly 85 million.
Middle-income earners in China now have the luxury of better food, computers, vehicles, and furniture, trying to emulate the American way, which was once the envy of the world. As a result of this increased power, middle-incomers in China have given American companies more and more money by purchasing their goods. And more jobs in China are being created by Dow companies than are being created in America by all companies combined. As we head into 3Q earnings season, we will see many companies post profits that would have been unattainable in the 1980's during economic hardship in the United States.
Disgruntled traders have mistakenly shorted the market basing their strategies on a distressed American economy. Perception is reality, not always. Traditional trading methods may have proven profitable, but globalization has weeded out poor traders unwilling to admit to the reality of the 21st century.
Over the past year, earnings reports from multinationals have been stellar, but many admit that less than half their revenues now stem from America. And with Q3 earnings now underway, we could soon see more conglomerates share this information.
The companies of the Dow Jones reliance on the American people for profits will continue to diminish if China's expansion is for real. In a not-too-distant future, the Dow Jones, which will still consist of 30 of the largest and best American companies, will no longer represent the state of America, but represent the global economy and how the shift of power has moved to the East.
Consider this: America's estimated population is about 310 million, about one quarter of the population of China, and only 4.5 per cent of the world's population. The Dow Jones, which turns 126 years old this month, has seen itself start off as a railroad heavy index focused solely on American growth turn to a more consumer-based index focused on global expansion. Over the next 126 years, there will be major changes in the world and the directional flow of money. It is highly conceivable that growth in every part of the world will be fairly equal, meaning the 30 companies of the Dow Jones will earn only 5 per cent of their income from America and evolve well beyond its American industrial roots.
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