The Dow’s the favorite, but unreliable
TEXT OF STORY
KAI RYSSDAL: The Dow was up 400-some odd points today. That’s nice. It’s reassuring. But quite possibly not the most important economic news of this day. Or any other day. The Dow Industrial Average consists of just 30 stocks, after all. The roster changes from time to time. And today is one of those times.
Dow Jones says come next Monday it’s going to drop AIG, the big insurance company that Washington just bailed out. AIG is gone. Kraft Foods is in. That’s right, the company that touts the fact that it’s the cheesiest. So back to my original point. If the most popular market indicator can swap out a huge international insurance company with net revenues of $110 billion last year, and replace it with a food company that makes about a third of that, how much weight should we really be giving the Dow?
Marketplace’s Jeremy Hobson has that story from New York.
JEREMY HOBSON: So, who makes the decision to get rid of AIG and replace it with Kraft? This guy, for one: Ken Brown, one of the editors of the Wall Street Journal, a Dow Jones publication.
KEN BROWN: When we looked at what we didn’t represent in the index, we saw food companies and consumer goods companies were under-represented in that sense. We have McDonalds and we have Coke but nothing like Kraft.
Brown says Journal editors want the Dow average to represent the various sectors of the U.S. economy. But Stanford economist John Shoven says it never will, no matter what they put in it.
JOHN SHOVEN: Well, it’s a very flawed index. It’s the worst, pretty much, of all the stock indices. Its only claim to fame is its extremely long history — it’s approaching 120-year history, now.
Why is it the worst? Because, he says, stocks are equally weighted, with no accounting for the size of each company. So one stock’s collapse can pull down the entire average. And there are only 30 stocks in the Dow — as compared with the S&P’s index of 500, or the 5,000 stocks in the Wilshire.
Dan Siever is a finance professor at San Diego State University. He says the bigger indices are a better gauge of the market, but the Dow definitely wins the popularity contest.
DAN SIEVER: It’s a nice shorthand and people know what you’re talking about. You say “The market’s down 450” and everybody knows you’re talking about the Dow Average. And if some people started talking about the Wilshire, you know nobody would pay as much attention. But if you want to say “How’s my performance compared to the market?” you’d never compare it to the Dow. You’d compare it to the Wilshire.
Just in case you were wondering, both the Dow and the Wilshire are down about 15 percent for the year.
In New York, I’m Jeremy Hobson for Marketplace.
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