How Relevant is Dow 14,000?

The move from Dow 12,000 to Dow 14,000 has been pretty stunning. How relevant is that index though? We can argue that it is heavily weighted towards mega cap stocks, and that is true, but so is the S&P 500 since it is market cap weighted. Some of you may not be aware of this, but the Dow Jones Industrial Average is not market cap weighted. Instead, it is share price weighted.

This serves to make its moves pretty much irrelevant in terms of gauging the market’s overall health. A one dollar move in Boeing (BA) has the same effect as a one dollar move in Microsoft (MSFT), even though Boeing trades over $100 per share and MSFT shares sell for $30 each.

What is the end result of this pricing method for the Dow? Boeing has more than 3 times as much influence as Microsoft does, and the same pattern holds for any other Dow component. In fact, materials and industrials account for a whopping 35% of the Dow Jones Industrial Average due to their high share prices (which may not be shocking given the name of the index).

Those two groups have been leading the market higher, so it is not surprising that the Dow has been soaring. On the other hand, financial services firms have been lagging this year, but they only account for 14% of the Dow, more than 30% less than their weight in the S&P 500. Dow 14,000 is a nice round number, but it really doesn’t tell us a lot about the market as a whole, only certain sectors that dominate its composition.

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One Thought on “How Relevant is Dow 14,000?

  1. I totally agree on your opinion of the Dow and its relevance as a market indicator. I often grit my teeth a little when pundits on CNBC always point to the Dow to show that the markets or, worse yet, the “economy” is as healthy as its ever been. Though, I guess there’s no denying that the equity markets are doing very well. While no single index necessarily paints the whole story, the S&P and NYSE composite indexes in addition to the Dow being at record levels has to mean something.

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