Fisher Investments Editorial Staff
Media Hype/Myths

How Now, Dow

By, 02/22/2012

Editor’s Note: MarketMinder does not recommend individual securities; the below is simply an example of a broader theme we wish to highlight.

On any other day, Greece finally finalizing its second bailout would be huge news. But Tuesday, at 11:24 AM EST, the Dow Jones Industrial Average crossed 13,000 for the first time since May 2008. It fell back below within minutes, but no matter: “Dow Hits 13,000” seemingly left all other stories in the dust. 

As ever, we question the fuss. The Dow is, has always been and will likely always be a broken index. Consisting of only 30 large US companies, it’s not at all a fair representation of the global market. More damning is its poor construction—as a price-weighted index, a stock’s impact is driven by its per-share price, not its actual size. What does that mean? Caterpillar’s per share price is currently $115—so it has almost four times the impact on the Dow as Microsoft and its $31 per-share price. However, Microsoft’s market capitalization of $264 billion is over 3.5 times larger than Caterpillar’s! Shouldn’t a bigger firm have more impact on an index? (Answer: Yes. And in market capitalization-weighted indexes like the S&P 500 and MSCI World, it does.) Price weighting means, in a given year, if the high-priced-per-share stocks beat the low-priced-per-share stocks, then the Dow does better than the economic returns of its stocks. It’s not an accurate view of reality. 

Of course, even if the Dow were the greatest index of all time, we’d find the obsession with 13,000 head-scratching. Sure, it’s a round number, but that doesn’t make it meaningful. Fact is, a 13,000 Dow is no more or less important than 12,999, 13,001 or any other level—it’s an arbitrary milestone. Our favorite headline Tuesday summed this up rather nicely: “Dow Reaches Number With Aesthetically Pleasing Number of Zeroes.”

Some might say the real story is that the market by most measures is back to or near May 2008 levels. But there’s nothing special about those levels either. If the object is to show how far we’ve come since the bear’s depths, why not look at the March 2009 low? Since then, stocks (as measured by the more correctly constructed S&P 500) have roughly doubled.

But even that’s merely a psychological benchmark. Knowing how far stocks have come since the bottom—despite the volatility along the way—can provide tangible evidence the market is rewarding investor patience (as it usually does if given enough time). Yet what markets have done till now doesn’t say anything about how they do from here (not that some aren’t trying to extrapolate such a point). That’s true whether we’re talking percentage returns or index price levels over any short period. Markets aren’t serially correlated—past movements don’t predict future returns. And markets don’t care one whit for milestones or other arbitrary markers.

So take Tuesday’s news for what it was—the market equivalent of Hank Aaron’s 700th home run, Nolan Ryan’s 5,000th strikeout or Brett Favre’s 500th touchdown pass. Fun, round numbers, but only checkpoints on the way to something greater.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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