The Dow Stands Out: Our Fascination with the Market's Least Intelligent Index
Nonetheless, the Dow continues to thrive.
The Dow reaching 40,000 on Thursday was featured on various major TV news headlines and websites, a reassuring whole number signaling positive shifts. Perhaps you're not entirely sure what this represents. However, you know it's increasing, and an increase is preferable to a decrease.
"If you're not an investor, you understand that a growing stock market indicates a stable economy, and your job security is likely improved," explained Nick Colas, co-founder of market research firm DataTrek.
The Dow tends to be more popular among laypeople compared to the S&P 500 - a comprehensive gauge of Wall Street's activities. According to Colas, Google searches for "Dow Jones" outnumber those for "S&P 500."
The Dow is merely an index tracking the stock market activities of 30 significant American corporations, ranging from Amazon to McDonald's to Walt Disney Corporation. But its age gives it an edge.
"The Dow is, unquestionably, an outdated index," said Daniel Alpert, managing partner of Westwood Capital. "Its main advantage is that it extends back indefinitely."
A historical perspective
To examine the performance of stocks before the 1929 stock market crash, the Dow is the only index preserving such information.
The Dow's lineage can be traced back to the 1890s whereas the S&P 500 wasn't established until 1957, post-World War II's economic havoc.
The Dow serves as a historical record of the US economy, akin to those illustrations charting the human species' development from Neanderthals to Homo sapiens.
You can observe the shifting trends of heavy industry and the rise of Silicon Valley via the Dow's composition, initially dominated by players such as Standard Oil and U.S. Steel. Current heavyweights include UnitedHealth, Microsoft, and Goldman Sachs.
Unconventional Weighting
More discerning traders occasionally dismiss the Dow due to its assigning weight to companies based on share price, instead of market capitalization, like the S&P 500.
In the Dow, a less important company with lower influence may overpower a more critical one. Presently, Goldman Sachs, a Wall Street bank with minimal consumer interface and a market valuation of approximately $125 billion, is deemed more significant than Apple, a $3 trillion tech juggernaut with a billion customers.
The Dow's unique point system: You sum up the price of each company's stock, divide by the "Dow divisor" - a constant factor that offsets market fluctuations.
To clarify the Dow's illogical methodology, Colas shared, "If someone asks how your kids are doing, you'd add their ages. I've got a 10, 5, and 3-year-old - I'm 18 ... A higher number doesn't really inform you, but it hints that your kids are getting older."
Flaws notwithstanding, the Dow is a powerful brand rooted deep in the American psyche.
"It's an imperfect index," Alpert commented. "But it's the term that, in the minimum number of characters, conveys Wall Street."
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Source: edition.cnn.com
