The Dow Jones Industrial Average, the index of 30 leading large-cap stocks, has been flirting with the 13,000 mark all week. The last time the index closed above 13,000 was in May 2008. Right on cue, there were a slew of headlines in the financial press trying to assign significance to this number. While some market commentators argue that there are important psychological implications for investors when a major index reaches an apparently significant round number, at O’Brien Greene we prefer to measure market performance in terms of more substantial numbers like corporate earnings.
A recent article in the New York Times Magazine “Why Do We Still Care about the Dow?” goes a step further and makes the case the Dow itself is an outdated measure of market and the economy:
In the postwar boom of the 1950s, the economy was growing so fast, and the benefits were so widely shared, that following 30 large American companies was a solid measure of most everyone’s personal economy. Back then, the U.S. was a largely self-sufficient country, so Asian or European economic troubles didn’t matter much. … [Now] rather than being a useful indicator, [the index] is an anxiety-amplification device. It reflects investors’ own reactions, and often hysterical overreactions, as they progress through the turmoil.
Any index will have limitations, and the Dow is certainly not perfect. The real problem, however, is not so much the indices as the way the media tends to abuse them, announcing their fluctuations with great hype hundreds of times a day. The Times says that Charles Dow, who founded the index in 1896, believed that the index should be checked and studied on a quarterly basis. This sounds about right. While it’s hard to avoid following the indices more frequently these days, investors shouldn’t attach too much importance to them except over quarters and years. Nor should they get too worked up about the index reaching a round number.