Without question, the Dow index is the legendary “rock star” of Wall Street. Since being first reported in 1885, its composition has changed many times. Founded by Dow Jones & Company, the 30 stocks in the index are picked by the editors of the Wall Street Journal, also owned by Dow Jones & Company that became part of Rupert Murdoch’s News Corp. in December 2007.
The Dow has celebrity status among financial reporters and cable TV commentators. On the network and local evening news, it grabs the spotlight momentarily. And among ordinary market watchers like me, I thought the Dow provided the best insight into the state of the nation’s overall economy.
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Kiplinger Magazine contends the DJIA is too outdated and prefers Standard & Poor’s 500 (S&P 500) index. The main difference between the two is that the Dow measures a price-weighted average of 30 stocks while the S&P 500 looks at a market value-weighted index of 500 stocks.
Other significant benchmark indexes include the Russell 3000 Index, Vanguard Total Stock Market Index, NASDAQ Composite, and the Wilshire 5000.
With so many indices, which is the most relevant? Is it time for casual investors to ditch the Dow? Which standard provides the best appraisal of the overall economy?
Thomas J. Feeney, chief investment officer of Mission Management & Trust Company, 3567 E. Sunrise Drive, says despite the Dow’s great popularity among the general public, “more investment professionals now measure performance most frequently against the S&P 500.”
“It is a broader index, more indicative of a greater cross-section of the investment universe. It includes companies ranging in size from the giants down to those in the mid-cap range,” he said.
When do-it-yourselfers and professional investors compare the DJIA and the S&P 500 over time, they perform relatively similarly. On Nov. 9, for example, both indexes set a new high for the year. The Dow was up 2.03 percent and the S&P 500 was 2.22 percent higher.
The decline of stocks measured by the two between the Oct. 9, 2007 peak and the March 9, 2009 bottom were within three percentage points of each other.
“Even among investment professionals, more people probably identify the level of the Dow before that of any other stock index. The Dow is a reasonable representation of the progress of corporate America’s large-company segment. It has value because it has a far longer history than any other common measure of stock price progress,” Feeney said.
People more interested in a broad range of technology companies will typically pay more attention to the NASDAQ indexes. Those measures include “a substantial tech weighting in their universe.”
Meanwhile, the most popular reference for small stock investors is the Russell 2000 index of market capitalization of small company stocks.
“It is fair to say that the level of personal interest could depend on the category,” he said. “But for the broader market, when you look at investment reports, most professionals use the S&P as their standard baseline.”
Kiplinger’s went so far as to call the Dow hopelessly archaic, a “really dumb index” that should be retired. Dozens of other indexes are available that measure stock performance in both broad and specific categories.
After all this enlightenment, I came to a few conclusions. First, the available stock market data is overwhelming. Next, I’m going to venture out slowly to become more educated on different indexes. Third, I agree the S&P 500 provides a better big-picture view of the national economy. Fourth, casual savers like me need a better tool to evaluate their investments.
And last, during my daily checks, I’ve decided to ditch the Dow and take stock in the S&P 500.
Contact Roger Yohem at ryohem@azbiz.com or (520) 295-4254. Prior to joining Inside Tucson Business, Yohem logged more than 25 years working in corporate marketing, public relations and communications work. His Business Notebook column weighing in on local political, social and business issues appears biweekly.
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