Dow milestone is a dud

The Dow Jones reaching 25,000 has got newspapers all in a flap. That, as John Stepek explains, is just plain nonsense.

878-dow-634

Don't be too impressed by nice round numbers

Dow 23,000! Dow 24,000! Dow 25,000! In recent months, the investment press has had no shortage of big round numbers to get overexcited about as the Dow Jones Industrial Average one of the headline stockmarket indices in the US has hit high after high. Some reporters have even taken to measuring the speed of each sprint. For example, The Wall Street Journal suggested that the Dow's recent run from 24,000 to 25,000 was the fastest 1,000-point gain in its history.

This is plain daft, as John Authers points out in the Financial Times. First, it should go without saying that, in percentage terms, climbing 1,000 points from 24,000 is less of an achievement than gaining 1,000 points from 20,000. Second, the "record-breaking" claim is not true it took 35 days to hurdle the most recent 1,000-point milestone, a feat matched twice before in the past. But there's an even more compelling reason to ignore the Dow it's a "useless index".

Consign the Dow to history

The Dow index was first calculated in 1896 by Wall Street Journal editor and Dow Jones & Company founder Charles Dow. The original had 12 stocks, chosen by Dow to give a sense of how America's industrial companies were doing (Dow also published a Dow Jones Transportation Average, which focused on railroad companies). There are now 30 stocks, which are handpicked to be representative of US business in general. This is clearly not particularly scientific but that's the least of its worries.

Unlike market-cap-weighted indices, the Dow is not weighted according to a company's market value, but rather its share price. So Goldman Sachs, with a share price of around $255, carries more weight in the index than tech giant Apple ($175 a share), even though Apple is nearly ten times bigger in terms of market cap than the bank. Similarly inadequate indices include Japan's Nikkei 225 the Topix index is a far better alternative.

You could dismiss this as the sort of thing that only financial journalists and other pedants get worked up about. After all, broadly speaking, when the S&P is going up, the Dow goes up too, and the same on the way down. But if you are trying to measure the health of the corporate sector (or at least shareholders' optimism about it), then you ideally want the measure to be as accurate as possible.

Besides, in reality the performance of the Dow and the S&P can diverge quite significantly at times. Incidentally, as James Mackintosh noted in The Wall Street Journal last year, a calculation error made when the index reopened after the start of World War I means the Dow's current value isn't even correct by rights, it should have passed 30,000 at this time last year.

Recommended

Stockmarkets have a spring in their step
Stockmarkets

Stockmarkets have a spring in their step

Global stockmarkets have been basking in the post-Covid economic recovery as GDP, retail sales and manufacturing are all on the way back up.
23 Apr 2021
Stockmarkets shrug off turbulence
Stockmarkets

Stockmarkets shrug off turbulence

Stockmarkets have hit their first bout of turbulence of the year, but most are clinging onto January’s gains.
4 Feb 2021
Forget bitcoins, turn to real coins as an inflation hedge
Alternative investments

Forget bitcoins, turn to real coins as an inflation hedge

As the recent bout of craziness in the cryptocurrency markets shows, bitcoin isn’t much of a hedge against anything. So as the price of all physical t…
17 May 2021
US stocks look expensive – here’s what to own instead
Investment strategy

US stocks look expensive – here’s what to own instead

Right now, US stocks are among the most expensive in the world. So if you want a decent return on your investments, you should look into diversifying …
17 May 2021

Most Popular

How will Joe Biden’s capital gains tax rise affect crypto prices?
Bitcoin & crypto

How will Joe Biden’s capital gains tax rise affect crypto prices?

The US president wants to increase capital gains tax – and that’s going to hit a lot of American cryptocurrency speculators. Saloni Sardana looks at h…
14 May 2021
US stocks look expensive – here’s what to own instead
Investment strategy

US stocks look expensive – here’s what to own instead

Right now, US stocks are among the most expensive in the world. So if you want a decent return on your investments, you should look into diversifying …
17 May 2021
Inheritance tax planning: the rules around gifting
Inheritance tax

Inheritance tax planning: the rules around gifting

There are plenty of legal ways to minimise an inheritance tax bill. Perhaps the simplest is to give away assets to reduce the size of your estate. Dav…
11 May 2021