The US financial indices comparison
There are several critical financial indexes in the United States that provide insight into the health and performance of different sectors of the economy. Here are some of the major ones:
Dow Jones Industrial Average (DJIA): This index tracks the performance of 30 large, publicly-owned companies in the United States. It is often used as a general indicator of the overall health of the stock market.
S&P 500: This index tracks the performance of 500 large-cap stocks listed on the New York Stock Exchange (NYSE) and NASDAQ. It is often used as a benchmark for the broader stock market’s performance.
NASDAQ Composite Index: This index tracks the performance of all the companies listed on the NASDAQ stock exchange, which is known for its heavy representation of technology companies.
Russell 2000 Index: This index tracks the performance of 2,000 small-cap companies in the United States, and is often used as a benchmark for the performance of small-cap stocks.
Wilshire 5000 Total Market Index: This index tracks the performance of all publicly-traded companies in the United States, and is considered the most comprehensive measure of the overall stock market.
In addition to these major indexes, there are many other indexes that track specific sectors or industries, such as the Nasdaq Biotechnology Index, which tracks the performance of biotech companies listed on the NASDAQ exchange.
Here is the US financial indices comparison between the CMI model ∆P-index graph, S&P 500 graph and Dow Jones Industrial Average. The Dow Jones index has been reduced by 10 times for clarity of comparison of graph forms.
Within the CMI model, we divide the common money supply (M2) into two parts: a neutral one (that does not affect the real economy) and a non-neutral one (that does affect the real economy). According to this model (see the CMI model main principles section) the non-neutral monetary aggregate (MCMI) forms the business cycle and provides objective support for financial markets from the real economy (see Fig 1 ). Therefore, according to the model, at least five critical points of the business cycle should also affect the dynamics of the main financial indexes.
Fig.1 The US financial indices comparison. Our ∆P-index monthly dynamics are marked by five critical points of the US business cycle according to the CMI model. Dow Jones Industrial Average (DJIA) and S&P500 financial indexes quarter dynamics (www.finance.yahoo.com) are marked by critical points of CMI-model generated in Fig.1.
Green vertical line = upward short-term trend
Red vertical line = short-term downward trend
∆P = 0 = Orange vertical line = starting (ending) point of the recession
Official US Recessions starting (December 2007 and February 2020) and ending points (June 2009) are marketed by greyed areas.
You can also see the QE points of quantitative easing in Fig.1. Quantitative Easing (QE) is a monetary policy tool used by central banks, such as the Federal Reserve in the United States, to stimulate the economy and encourage lending and investment. The policy involves the central bank buying government bonds and other financial assets from commercial banks and other financial institutions in order to increase the money supply and lower interest rates. The idea behind QE is that by increasing the supply of money in the economy, it will become easier and cheaper for businesses and individuals to borrow money, which in turn can lead to increased spending, investment, and economic growth. Lower interest rates can also encourage investors to seek higher returns in riskier assets such as stocks and real estate, which can help boost asset prices and further stimulate the economy.
QE is typically used as a last resort when other monetary policy tools, such as lowering interest rates, have been exhausted. It can be a controversial policy, as some critics argue that it can lead to inflation and increase the risk of financial bubbles. However, proponents of QE argue that it can be an effective tool for stimulating the economy during times of recession or economic slowdown.
Table from (How to read the ∆P-index? section) characterizes these affects, considering that real GDP growth is the maximum one at ∆P = 0, and it is decelerating just before ∆P+ max and demonstrates some acceleration just after ∆P+ max.
TABLE 1. ∆P INDEX INTERPRETATION
Critical points of ∆P | Impact on the economy or economic trend (It may be strengthened or softened by Fed monetary policy actions or external factors) | Point’s number, intervals |
∆P = 0 | Starting (ending) point of a recession. Market correction (sell-off) for financial indexes | Points 1, 3, 5,7,9 |
∆P < 0 | Recession phase of business cycle | Between points 1-3, 5-7, 9-11 |
∆P > 0 | Economic growth phase of business cycle | Between points 3-5, 7-9, 11+ |
∆P = + max | Inflection point (changing of economic growth trend). Economy slowdown just before this point (quarterly GDP may reach negative numbers, but with no recession as ∆P>0) and we can see sell-off for financial indexes. Then economy accelerates just after this point and we can see short-termed rapid growth for the stock market indexes. | Points 4,8,9,10
After points 4, 8, 12 |
-1 < ∆P < +5 | Economy acceleration with its peak at ∆P → 0 (Boom phase). Stock market indexes may reach their peak before financial crisis, as support to financial markets from real economy is maximum |
|
∆P > 20÷50 | Low economic growth phase (may be stagflation) Stock market indexes are growing. This phase of a cycle corresponds to aggressive incentives from Fed (quantitative easing monetary policy, for example) |
|
from ∆P < -1 to ∆P = – max | Recession. Financial crisis | After point 5 to point 6, from 9 to 10 |