Market Musings: The Dow is a Joke

When I worked at a large investment manager, everyone I knew would always ask me about the markets, where I thought they were going to go, and what stocks I liked.  Usually, someone would bring up how high or low the Dow Jones Industrail Average moved on a particular day and it would make me cringe thinking about how people would pay attention to this index.  They didn’t realize that the Dow Jones Industrial is a joke and has been for years.

It’s not really their fault.  If you pick up the paper or turn on the TV the day after a big market move, then you’ll hear a bunch of tv personalities talking about the Dow Jones Industrial.  They’ll do this because the Dow is the most volatile of the main indexes so it makes for a better headline.

As Barry Ritholtz writes in this Bloomberg article, the Dow Jones doesn’t make any sense because companies are weighted based solely on their stock price.  Which means smaller companies with higher stock prices like Goldman Sachs make up a larger part of the Dow than GE, one of the largest companies based on market value.  Does that make any sense? No.  Does it provide any insight on the direction of the market? No.

The next time you hear anything about the Dow just ignore it and look at the S & P 500.  The Dow is a joke.