Last week, the Dow Jones industrial average crossed above the 11,000 mark to a spattering of cheer and applause from the mass media and those who still follow the more than 100-year-old stock market average. Foolish analyst Anand Chokkavelu asked three of my esteemed colleagues about the importance of the move and what it means for stocks going forward.
My response was much simpler: Who really cares?
How now, Dow?
Now I'm not jealous that Anand didn't ask me for my opinion, and to be fair, he was really asking if the market is overvalued after stocks had their largest September percentage increase since 1939.
But let's face it: The Dow is no stranger to 11,000. In fact, the average has now crossed through the threshold 37 times since its first trip above the mark in May 1999. Since 2008 alone, we have seen AIG
What's more interesting is the decision not to add Apple to the index and the potential ramifications this would have had. Bloomberg recently noted that if Apple had been added instead of Cisco to the Dow Jones industrial average, the index would be trading well above its highs for the year of 11,258, set back in April.
Does the Dow really matter?
Created in 1896, the Dow is composed of30 large-cap stocks. Because it's a price-weighted average, IBM, with a stock price of over $140, has more than five times the influence of Microsoft, which trades around $25 a share. That's despite the fact that IBM's market capitalization is smaller than Microsoft's.
Similarly, Bank of America's
S&P a better alternative
In contrast, the Standard & Poor's 500 index uses a much different approach. The index's 500 stocks include all of the companies in the Dow Jones industrial average as well as 470 other diversified companies. The companies are weighted by their market capitalization, with the largest weightings given to ExxonMobil and Apple. Even Exxon only has an index weight of about 3%, while IBM weighs in at around 1.6%.
The S&P also differs from the Dow in that it includes companies that are much smaller than the giants that the Dow owns. Market caps in the S&P 500 run all the way down to small-cap range, with Eastman Kodak
Drown out the media sound
The Dow still has its place as a popular measure, but it doesn't really serve as a bellwether for stocks generally. While the performance of Dow members is certainly important to our economy, so is the performance of other businesses that aren't represented in the Dow. So tonight when your evening newscast reports on the daily move in the Dow, you too can say: "Who cares?"
Do you still follow the Dow closely? Let us know in the comment box below.
