Q: The Dow Jones Industrial Average just crossed 23,000. Does this mean stocks are getting expensive?
The Dow Jones Industrial Average is not only an arbitrary number, but it is a flawed indicator of how well the stock market is performing.
For starters, the index only considers 30 large stocks. Companies like Apple, Johnson & Johnson, and Microsoft are members. Between the NYSE and Nasdaq alone, there are more than 5,100 publicly traded companies, and the index only represents less than 1% of them.
Additionally, it is a price-weighted index, meaning that stocks with higher share prices matter more to the index's performance. This means that Goldman Sachs, which trades for about $242, has about six times the influence on the Dow as $40-per-share Intel, despite the fact that Intel is twice as large as Goldman Sachs in terms of market cap. In fact, it was a strong day by relatively high-priced Johnson & Johnson that caused the Dow to eclipse 23,000 for the first time.
The bottom line is that when the Dow (or any other index, for that matter) hits a milestone, take it with a grain of salt. There will always be some stocks that look cheap and some that look expensive, so it's still important to consider any potential stock investment on a case-by-case basis.
Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Matthew Frankel owns shares of AAPL. The Motley Fool owns shares of and recommends AAPL and JNJ. The Motley Fool has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool recommends INTC. The Motley Fool has a disclosure policy.