Yuki Iwamura/AP
While most professional investors focus on the S&P 500, everyday Americans look to the Dow to find out what's going on on Wall Street.
new york
CNN
—
At best, the Dow Jones Industrial Average is an imperfect barometer of stock market activity for a narrow range of very large U.S. companies. It's clunky and too narrow in scope for Wall Street experts to pay serious attention to.
Nevertheless, the Dow persists.
As the Dow reached the 40,000 mark on Thursday, the news was splashed across most major TV news outlets and websites, and the numbers were a comforting number that told the world that something good was happening. . Maybe you don't really know what that means. But you know it's going up, and going up is better than going down.
“When you say 'Dow,' most people probably mean the stock market,” said market strategist Art Hogan. “The Dow Jones Industrial Average is a way to instantly tell the world in which direction the market is moving, even though the average is not an accurate measure of the thousands of stocks listed on the nation's exchanges. ”
While most professional investors focus on the S&P 500 (a broader measure of what's going on on Wall Street), Americans focus on the Dow every day. Nick Colas, co-founder of market research firm Datatrek, said there are always more searches for “Dow Jones” on Google than for “S&P 500.”
“Even if you're not an investor, you know that a rising stock market means the economy is doing well and you're probably less likely to get laid off,” Colas says.
There's nothing magical about the Dow. It's just an index that tracks the stock market activity of 30 of America's largest companies, from Amazon to McDonald's to the Walt Disney Company. But it's very old, and that's part of the reason it remains.
“The Dow is definitely an anachronistic index,” said Daniel Alpert, managing partner at Westwood Capital. “The main benefit is that it’s forever traceable.”
If you want a peek into stock price movements in the days leading up to the October 1929 crash, the Dow is the only index that stores that information in amber.
Looking back at the Dow, The S&P 500, on the other hand, wasn't created until 1957, well after the economic turmoil of World War II.
The Dow serves as an ongoing history of the U.S. economy, similar to a graph showing the evolution of humans from Neanderthals to Homo sapiens.
You can track the rise and fall of heavy industry and the emergence of Silicon Valley through changes in the Dow's constituent stocks, once dominated by Standard Oil and U.S. Steel. Recently, UnitedHealth, Microsoft, and Goldman Sachs have been major players on the Dow.
Serious traders often look down on the Dow. This is because the Dow ranks companies by stock price, rather than market capitalization like the S&P 500. Market capitalization measures the total value of a company in the stock market.
In the Dow Jones Industrial Average, small and medium-sized companies that are less relevant to the economy may outperform large companies. For example, the Dow Jones Industrial Average, in its current iteration, shows that Goldman Sachs, a Wall Street bank with little consumer-facing business and a valuation of about $125 billion, has a higher valuation than Goldman Sachs, which has 1 billion customers. It considers it more important than the nearly trillion-dollar tech giant Apple.
How points work: You take the price of a single share for each of the 30 companies, add them together, and divide by the “Dow Divisor,” a fixed number that helps explain market fluctuations.
Explaining the strange logic of the Dow, Colas told me: “I have kids who are 10, he's 5, and he's 3. I mean, he's 18. The big numbers don't really tell me anything, but, well, my kids are growing up. I feel like I am.”
Despite its flaws, the Dow Jones Industrial Average is a powerful brand ingrained in the American psyche.
“This is a very incomplete index,” Alpert said. “But this is the shortest word possible to describe Wall Street.”
