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If you pay any attention to US financial markets, you can't avoid the Dow Jones Industrial Average (DJIA).  It's cited every single day as one of the THE barometers of our financial and economic strength; it runs across the bottom of at least a dozen TV channels throughout the day, and the evening news breathlessly announces every day's changes and celebrates each new record high.

I pretty much ignore it.

How can someone turn their back on THE indicator, THE barometer, THE MOST IMPORTANT NUMBER IN THE ENTIRE WORLD OF PUBLICLY TRADED COMPANIES?

Follow me below the Great Orange Colophon for the answer...

Well, the short answer is that the DJIA has been faked and fudged so many times that I believe it has lost all value as any sort of long-term indicator.  At best, it can only be viewed in terms of relatively short increments of a few years - and that has been true for as long as the DJIA has been in existence. Let's take a look...

Dow Jones' own description of the DJIA reads, in part:

The 30 stocks now in the Dow Jones Industrial Average are all major factors in their industries, and their stocks are widely held by individuals and institutional investors.
Sounds impressive, comprehensive and downright important, yes?  Wait...why is it "stocks now listed"?  The answer is simple; the DJIA has been subject to the most basic form of 'gaming the system'--changing the stocks included in the process--since its inception.

The original Dow Jones "average" of 1884 consisted of 11 stocks (9 railroads plus Pacific Mail and Western Union).  Within 9 months, however, Jones had to make the first tweaks to his average, to account for the merger of St. Paul Railway into the Chicago, Milwaukee and St. Paul Railroad; he also added 3 more railroads to the mix.  These changes didn't last long, however; additional changes were made in 1886 and 1894.  Finally, in 1896, the last railroad stocks were removed from the DJIA, and these firms made up the first all-industrial DJIA:

American Cotton Oil     American Sugar     American Tobacco   Chicago Gas    
Distilling & Cattle Feeding     General Electric  Laclede Gas     National Lead    
North American    Tennessee Coal & Iron     U.S. Leather pfd.     U.S. Rubber
To give you a perspective on the numerical DJIA, the first average computed with this group of stocks was 40.94...a far cry from today's 15994.77, eh?

Now, I'll spare you a blow-by-blow of the changes made to the DJIA in its early years; suffice it to say that companies were swapped in and out of the DJIA 33 times between the initial all-industrial list of 1896 and 1939.  (The DJIA was left unchanged during WWII.) Let's take a look at the first post-WWII changes to the DJIA, made in 1956:

Allied Chemical  American Can     American Smelting    American Tel. & Tel.
American Tobacco B     Bethlehem Steel     Chrysler     Corn Products Refining
Du Pont     Eastman Kodak Company     General Electric Company    General Foods
General Motors Corporation     Goodyear     International Harvester  International Nickel
International Paper Company   Johns-Manville    National Distillers   National Steel
Procter & Gamble Company     Sears Roebuck & Company   Standard Oil of California
Standard Oil (N.J.)     Texas Company     Union Carbide     United Aircraft
U.S. Steel      Westinghouse Electric   Woolworth
This is important, because this was in many ways the benchmark of the 1950s economic boom; US industry was in full swing, and expansion was the rule of the day.  Almost all of the DJIA companies, save Sears Roebuck and Woolworth, were directly involved in manufacturing. This would change.

It's in the decay of that postwar boom that we see the fudging kick into high gear.  Consider the changes made to the DJIA in just the last 30 years or so:

1982: American Express Company replaced Manville Corporation (Johns-Manville).
1985: Philip Morris Companies and McDonald’s Corporation replaced General Foods and American Brands Incorporated (American Tobacco B).
1987: Coca-Cola and Boeing Company replaced Owens-Illinois Glass and Inco.
1991: Caterpillar Incorporated, Walt Disney Company and J.P. Morgan & Company replaced Navistar International Corp., USX Corporation and Primerica Corporation.
1997: Travelers Group, Hewlett-Packard Company, Johnson & Johnson and Wal-Mart Stores Incorporated replaced Westinghouse Electric, Texaco Incorporated, Bethlehem Steel and Woolworth.
1999: Microsoft Corporation, Intel Corporation, SBC Communications and Home Depot Incorporated replaced Chevron Corporation, Goodyear Tire & Rubber Company, Union Carbide Corporation and Sears, Roebuck.
2004: American International Group Incorporated, Pfizer Incorporated and Verizon Communications Incorporated replaced AT&T
Corporation, Eastman Kodak Company and International Paper Company.
2008: Bank of America Corporation and Chevron Corporation replaced Altria Group, Incorporated and Honeywell International, Incorporated.
2008: Kraft Foods Inc. replaced American International Group Inc.
2009: The Travelers Companies, Inc. replaced Citigroup, Inc. and Cisco Systems, Inc. replaced General Motors Corp.
2012: UnitedHealth Group Inc. replaced Kraft Foods Inc.
2013: The Goldman Sachs Group Inc. replaced Bank of America Corp., Visa Inc. replaced Hewlett-Packard Co., and Nike Inc. replaced Alcoa Inc.
That's a fairly high rate of changes and tweaks to the DJIA "mix"; the end result of all these is the current DJIA:
3M Company    American Express Company    AT&T Incorporated
Boeing Corporation    Caterpillar Incorporated     Chevron Corporation
Cisco Systems, Inc.    Coca-Cola Company     DuPont    Exxon Mobil Corporation
General Electric Company   Hewlett-Packard Company    Intel Corporation
International Business Machines    J.P. Morgan Chase & Company  Johnson & Johnson
McDonald’s Corporation    Merck & Company, Incorporated    Microsoft Corporation
Nike    Pfizer Incorporated    Procter & Gamble Company   The Goldman Sachs Group
The Travelers Companies, Inc.    United Technologies   UnitedHealth Group Inc.
Verizon Company   Visa    Wal-Mart Stores Incorporated   Walt Disney Company
So, remember when I said that the DJIA wasn't really good for anything other than increments of a few years?  Well, here's how long each iteration of the DJIA has lasted in the last 30 years:
1982-1985: 3 years      1985-1987: 2 years
1987-1991: 4 years      1991-1997: 6 years
1997-1999: 2 years      1999-2004: 5 years
2004-2008: 4 years      2008-2008: 7 MONTHS (AIG removed when the firm tanked)
2008-2009: 1 year       2009-2012: 3 years
2012-2013: 1 year       2013-present: 1 year
As you can see, we haven't had a consistent selection of firms in the DJIA for a period of more than 6 years in the last three decades.  The list has changed 5 times in the last decade alone; how can this kind of turnover/churn create any kind of meaningful long-term statistic?

Simply put, I do not believe that it can do so.  This is especially true when poorly performing companies are simply tossed out and replaced with the current "hot property." It's worth noting that only four companies have been a constant part of the DJIA since 1956: DuPont, General Electric, Standard Oil NJ (now ExxonMobil), and United Aircraft (now United Technologies).  Every other spot in the DJIA has turned over at least once...Hewlett-Packard in decline? Bring in Visa!  AIG folds?  Replace them with Kraft!  Wait, Kraft starts to stumble a few years later?  Toss them in favor of UnitedHealth!  One can even find a few examples of companies fighting their way back into the DJIA after lengthy periods of exile. Coca-Cola and IBM were both added in 1932, but Coca-Cola was tossed in 1935 and wouldn't return until 1987; IBM was dropped in 1937 and didn't make it back until 1979.  

What does this history tell us?  It's all artificial, folks, going back to when Dow Jones effectively gave up on railroads.  The DJIA isn't really worth using for any sort of long-term analysis or comparison. Perhaps the more interesting question is why so much of our attention is directed to that number each and every day...

Originally posted to wesmorgan1 on Wed Feb 12, 2014 at 05:06 AM PST.

Also republished by Community Spotlight.


Do you pay attention to the Dow Jones Industrial Average?

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Comment Preferences

  •  Breaking: Markets Still Rigged! (10+ / 0-)

    Starting with the metrics. DJIA isn't as bad as LIBOR, though.

    •  Rigged might apply to LIBOR (6+ / 0-)

      bit not to broad indices like the Dow or S&P. As indicated in this diary, these are widely misunderstood as well as their purported significance. The composition of the S&P indices change over time too just like the Dow, but the S&P doesn't account for the reinvestment of dividends (whereas the Dow does). The stock markets are not purely competitive, but I think "rigged" is too strong a term. And the indices are nearly meaningless, which is the point of this diary.

      If you own an "exchange traded fund" or ETF that is based on the Dow, the underlying stocks will change over time as explained in the diary. In that case the DJA might hold some meaning for you. But as a general indicator of the long term health of the economy -- not so much -- and certainly not enough to merit the daily/hourly reference to the DJA in our business news.

      A better measure is the percentage change in high overall market. However, focusing on daily returns is still like standing on the seashore and studying every wave that breaks on the shore in order to know something about what's going on in the ocean. Th world really doesn't work that way.

      Did you ver notice how har it is totype accurately on an iPad?

      by RudiB on Wed Feb 12, 2014 at 08:07:34 AM PST

      [ Parent ]

    •  LIBOR is rigged, but was never intended as (0+ / 0-)

      something for people to bet on or to treat as an economic indicator. The quotation media price of certain benchmark crudes is similar in that respect.

      That, in its essence, is fascism--ownership of government by an individual, by a group, or by any other controlling private power. -- Franklin D. Roosevelt --

      by enhydra lutris on Wed Feb 12, 2014 at 11:28:18 AM PST

      [ Parent ]

    •  Rigged, Absolutely Correct (0+ / 0-)

      It used to be that the price of a stock represented the health, wealth, solvency, and future prospects of a company.  Today is is nothing more than another form of fiat currency used in a special casino.  You would be just as well to put your money in bitcoins.

      "It's not surveillance, it's data collection to keep you safe"

      by blackhand on Thu Feb 13, 2014 at 08:59:13 AM PST

      [ Parent ]

  •  I'm a person who hears stock reports on the radio (6+ / 0-)

    occasionally and am sometimes irritated by idiot infotainers that think the DJIA serves as a definition for "the market".  I only look at the DJIA throughout the day to see if it is diverging from the broader averages, the SP500 and Nasdaq.

    But never have I seen anyone of any financial credibility claim the DJIA is "worth using for any sort of long-term analysis or comparison."  The S & P 500 or even the Wilshire indexes are used.

    So other than our really stupid media in this country, what happened that makes this an issue for you?

    I'm not liberal. I'm actually just anti-evil, OK? - Elon James White

    by Satya1 on Wed Feb 12, 2014 at 05:40:24 AM PST

    •  The spin applied to it, for one thing... (11+ / 0-)

      ...whether it's crowing about record highs, comparing numbers across decades, or just the gratuitous use of long-term graphs as some sort of "evidence."  In that respect, yeah, I'm mostly griping about the media.

      I think it's also instructive in terms of understanding just how much of our financial market is rigged by a fairly small group of insiders. Between this and LIBOR...

      From a historical perspective, it was interesting to see the rise (and fall) of various sectors of the market over time.

      Sure, it's a small thing...but I was surprised to learn of the frequency of changes made to the index, and thought other folks might find that information intreresting or useful.

      The word "parent" is supposed to be a VERB, people...

      by wesmorgan1 on Wed Feb 12, 2014 at 06:12:06 AM PST

      [ Parent ]

      •  Oh, the history is fascinating sometimes (2+ / 0-)
        Recommended by:
        wilderness voice, FarWestGirl

        about the nature of the sectors turning over or how different companies squander opportunities (eg. Kodak).

        And I hear you on the media thing.  I rarely expect to be educated or informed by the corporate media though.  Misinformed? YES!

        I'm not liberal. I'm actually just anti-evil, OK? - Elon James White

        by Satya1 on Wed Feb 12, 2014 at 06:39:17 AM PST

        [ Parent ]

      •  I've been down this rabbit hole before, wes. (1+ / 0-)
        Recommended by:

        Thanks a bunch for putting down a coherent diary on this. I tried but failed.

        In addition to the revolving door on the DJIA principals, the advent of the 401K radically altered the historical nature of the market.

        I think it went from $40.94 in 1896 to $800 in 1978. Enter the 401K - dumb money locked in for decades - and watch the graph - It quadruples by 1992, and quadruples again by 2006 or so, or so it did until we ran out of money.

        Not only do the 401Ks pump up the stock market, but they yoke the people to Wall Street's cart and tie our fate and "well being" to theirs.

        "Are you kidding? What would happen to our 401Ks?"

        I do wish you would have done the math and assembled the true value of the DOW today using defunct or disgraced companies. But I also know it's not an easy task, as that's where I dropped the ball on my attempt at writing this diary.

        Democracy - 1 person 1 vote. Free Markets - More dollars more power.

        by k9disc on Wed Feb 12, 2014 at 02:25:09 PM PST

        [ Parent ]

    •  The financial markets, (0+ / 0-)

      however broadly they are indexed, are not "the market" referred to by financial economists because these financial markets fail to include a lot of the economy, most notably real estate (not to also mention the old baseball cards that you've collected).

      Did you ver notice how har it is totype accurately on an iPad?

      by RudiB on Wed Feb 12, 2014 at 08:15:45 AM PST

      [ Parent ]

    •  The worst is when they try to think up (0+ / 0-)

      bogus reasons to explain a 20 point rise or drop. 'profit taking'? Sure whatever.

  •  Stock Indexes (9+ / 0-)

    Dow Jones is a stock index of merely 30 companies.

    S&P 500 is a broader index.

    Russell 3000 is even more broad than S&P 500.

    Most investors and professional money managers are not able to repeatedly beat any of these indexes.

    Therefore, as espoused by legendary investor John Bogle, most everyone should invest in low-cost index funds, and stop trying to beat the indexes.

    Just to clarify, the Dow is a lousy index because it is not broad based.  Invest in the S&P or Russell indexes.

    •  Well, after learning this about the DJIA... (6+ / 0-)

      ...I'd have to ask the same questions of other indices - how often are they tweaked in this fashion?

      According to Wikipedia (apply salt to taste), there have been 72 changes to the S&P 500 in the last 4 years.  So, there's a >10% fudge factor in using the S&P 500 index in analyses or comparisons over that time, right? I understand your point about the benefits of a broad-based index, but it's still subject to tweaking.

      I guess I'm just trying to get a handle on when medium- and long-term comparisons become apples-and-oranges due to the frequency/churn in the makeup of the index/indices.

      (I should point out that I am not a speculative investor; I'm just trying to understand the relative importance and validity of these things...)

      The word "parent" is supposed to be a VERB, people...

      by wesmorgan1 on Wed Feb 12, 2014 at 06:22:12 AM PST

      [ Parent ]

      •  When one stock replaces another (6+ / 0-)
        Recommended by:
        caul, Chi, mungley, grover, FarWestGirl, nextstep

        it is weighted to keep the average the same.

        The DJIA is not the sum of or the average of the stocks. Each is weighted.

      •  Really? (4+ / 0-)
        Recommended by:
        grover, artmartin, FarWestGirl, Hirodog

        Would you like Lehman Brothers (or any bankrupt and/or shrinking company, like Kodak) to still be included in the S&P 500?

        Should S&P/Russell exclude Google and Facebook?

        Those changes you refer to are because some companies are no longer part of the 500/3,000 largest companies in America, while others have joined the index.

        That's simply how both S&P and Russell indexes work - the largest 500 & 3,000 companies, respectively, are included.

        However, the Dow is a selected group that, according to the selection committee, are representative of the economy as a whole.

        So to come back and answer your question:

        No, the S&P/Russell are not tweaked, the companies included are self-evident and ranked according to market capitalization.

        Market capitalization is determined by the multiplying stock price x outstanding shares.  In other words, the market capitalization (capitalism) determines which are the largest companies.

        As to comparing Dow to S&P - over time, they track each other fairly closely, but Dow is changed by people, not market capitalization.

        •  Good info - thanks for explaining! n/t (1+ / 0-)
          Recommended by:

          The word "parent" is supposed to be a VERB, people...

          by wesmorgan1 on Wed Feb 12, 2014 at 10:47:29 AM PST

          [ Parent ]

        •  Thanks a bunch - quite helpful to have a clear (0+ / 0-)

          explanation in a few simple paragraphs.

          Interesting how those trends have changed though.

          The DJIA - an industrial average seems to have quite a few non-industrial players, and we seem to be replacing much of the industrial companies with things that finance industry or just make a lot of money, which wasn't quite the point.

          Your points about the Russell & S&P are really salient. I would like to see the trend for the turnover on the more broad based markets. Link - something succinct and clear like your post here...

          Democracy - 1 person 1 vote. Free Markets - More dollars more power.

          by k9disc on Wed Feb 12, 2014 at 02:31:30 PM PST

          [ Parent ]

      •  A crucial difference between the DJIA and SPX (3+ / 0-)

        S&P500 is that the Dow is a DOLLAR-weighted index, while the SPX is a market-capital-weighted index. that is, the SPX reflects the money actually invested in the 500 largest companies.  Since those 500 comprise a huge part (perhaps 90%) of the total corporate economy, it more accurately reflects the actual state of the entire US economy. The DJIA is only 30 companies, and it isn't cap-weighted, so it's only a fuzzy approximation of how those few companies are performing.  As a response to your apples/oranges question, think of it this way:  the SPX is reflecting not just 500 selected companies, but the capital underlying the bulk of the economic (non-real estate) activity in this country.  So for a long-term metric, it is far better than the DJIA or the NASDAQ index for gauging the financial performance of our economy.

      •  The SP 500 is to represent the top 500 US based (0+ / 0-)

        publicly traded companies as measured by market capitalization.

        Over time the top 500 change because companies grow, shrink and get acquired.  By definition it must change which companies are in the index.

        The most important way to protect the environment is not to have more than one child.

        by nextstep on Wed Feb 12, 2014 at 12:57:44 PM PST

        [ Parent ]

    •  well said (7+ / 0-)

      sorry, but the fact that any index of stocks meantioned in this thread, including the DJIA, the S&P 500, etc. are adjusted in the exact same way. companies grow from small to big, decline from big to small, get acquired, and disappear altogether all the time. of course its a fluid measure. the point of these measures has always been to produce a bit sized sample that attemps to represent the overall direction of the market at anyone time. of course they are adjusted periodically when the mix no longer is reprsentative of the market behavior you are trying to measure.

      those adjustments have nothing whatever to do with "gaming" the system. they are just examples of how the players in the market change over time.

      •  No. (3+ / 0-)

        You said, "the point of these measures has always been to produce a bit sized sample that attemps to represent the overall direction of the market at anyone time. of course they are adjusted periodically when the mix no longer is reprsentative of the market behavior you are trying to measure."


        There is nothing that measures market direction other than changes in stock prices.

        Stock prices are a reflection of what investors believe to be the future expectations of earnings.

    •  The S&P 500 is an index (2+ / 0-)

      of large-capitalization companies. It does not include mid-cap or small-cap companies that are a significant part of the overall economy.

      Did you ver notice how har it is totype accurately on an iPad?

      by RudiB on Wed Feb 12, 2014 at 08:21:08 AM PST

      [ Parent ]

    •  Can index funds actually match the indexes? (1+ / 0-)
      Recommended by:

      Broad based or not, the turnover has a cost that isn't really reflected in the headline number.

      A hypothetical Index fund would have to sell shares in companies that are removed from the Index and replace them with shares from companies that are added.

      In 2008 you would have had to sell your shares in AIG (after it crashed) and then buy non-crashed shares of Kraft. Would you really be in the same position as the DJIA after doing that?

      The Empire never ended.

      by thejeff on Wed Feb 12, 2014 at 09:53:01 AM PST

      [ Parent ]

      •  Yes. (2+ / 0-)
        Recommended by:
        left of center, FarWestGirl

        You asked, "Can index funds actually match the indexes?"


        An index fund would still have had AIG shares until the very day that AIG was replaced.

        More simply, an index fund might simply hold index Futures and have no need to buy/sell shares.

        As to any cost - people need to make a living.  Or, you can buy those shares all by yourself.  Which do you think is cheaper?

        •  I'm not sure I follow. (0+ / 0-)

          If I have money in an index fund (Or I'm mimicking one myself by buying and selling stock in that are in the DJIA) when AIG was replaced, I would have to sell all my shares of AIG for whatever paltry sum they're selling for. In order to match the weighting of the new member Kraft, would I just take the amount I got from selling AIG and buy Kraft with it, or would I have needed to put more money in to get Kraft up to the right balance?

          That's assuming I can buy and sell at exactly the right time to get the stock prices when the switch was made and ignoring the problem that all the other index funds are trying to do so, thus driving the prices.

          Not particularly concerned about fees, but about how the tracking itself loses value.
          Essentially survivor bias.

          The Empire never ended.

          by thejeff on Wed Feb 12, 2014 at 11:18:12 AM PST

          [ Parent ]

          •  Slow down. (1+ / 0-)
            Recommended by:

            If you have an index fund, the fund manager would be replacing AIG, not the individual investor.

            The timing of the purchase for the fund (manager) to mimic the index in your hypothetical is only on the day of the change.

            Any differential in the value of the exchange is subject to the volatility only for the day.

            You can either come out ahead with this volatility or on the short end.  This will average over time.

            Of course, as people come and go from the fund, the manager has to adjust the total value of the fund accordingly.

            Speaking as someone who trades for a living, the reconciliation is typically done around 3pm.

            To be clear, you might be a seller of your index fund shares while someone else is a buyer.  The fund manager does not make two discrete transactions; the fund manager reconciles the net trades around 3pm.

            By the way, fees in actively managed funds (not index funds) are far more costly than anything else.  Hence, John Bogle advises on low-cost and/or no-load index funds....because the average fund manager cannot beat their index benchmark over time.

            You're getting caught up in minutiae that is meaningless over the life of an index fund for a person who invests, let's say, through their 401(k) or equivalent each month for their working career.  For every mistake that an index fund manager makes against your total return, you gain it back in another transaction.

            For instance - if your portfolio is $1,000 and you receive an annual dividend of 2%, you would not like be able to reinvest these sums until you have a critical mass for more shares of stock.  However, a fund manager will aggregate these sums of money and keep the process of purchasing moving along.  Fund managers are far more efficient with cash than you could ever hope to achieve.

      •  Almost (4+ / 0-)

        Index funds will always be a little bit lower than the actual index, since they all have some sort of expenses.  In your example, yes, they would have to sell AIG and buy Kraft, but the value of the indices would have included that (less actual transaction costs) anyways.  Note, though, that in order to maintain the correct weighting, funds may need to sell out of well performing stocks, so you may end up needing to pay capital gains in good years (like last year).

        The trick is finding good index funds- Vanguard or Fidelity Spartan, for example, are down around .10% or lower for their expense ratios.  That's pretty minimal in terms of underperformance.  On the other hand, a fund with, say, 1.00% in expense ratios is suffering a lot from the turnover you're referring to, which in turn is going to bite heavily into returns.

  •  Do you have money in the market? (10+ / 0-)

    I believe most people with a retirement  account  (401k, IRA, ... etc) do have money in the market. Why wouldn't they pay attention to the stock market?
    I was told, if you don't want to know about individual funds or if you don't want to pay enormous fees, just buy the DJ Index or some mutual fund that mimics it.
    So, I do follow the Dow ...because that's where my retirement money is. I would really be foolish not to follow it.
    I believe more Americans should follow the stock market, because their retirement money, their kids college money, their company stock, ... etc is in the market.  

    •  different indexes for different purposes (11+ / 0-)

      Part of the diarist's beef I believe is that many in the media equate the DJIA with "the market".

      I hear that little voice in the radio say stuff like "the market is up today with the dow jones average increasing by 5 points" and nothing more.  It says so little and in terms of what an investor needs to do to pay attention to the market is nearly meaningless.

      When there are over 10,000 stocks in the US of diverse sectors, focusing so exclusively on 30 of the biggest large capitalization US stocks is not "the market".  

      This also brings to mind the fact that the capitalization of US based companies has been shrinking for some time as other countries markets gain capitalization.  Currency risk and world markets are also worth study.  Also many US companies end up earning much their revenue in non-dollar currencies.

      I take your point about how many of us are invested in markets though.  One huge pool of that money also resides in pensions.  The CA teachers pension is one of the biggest stockholders out there.

      When I want to be invested in the US market, but don't know what sector or company I want to choose, I will sometimes buy an ETF like spiders (SPDR) that mimic the SP500 index.  For the ones with large volumes of trading, their cost is as good or better than mutual funds these days.  It is still large cap, but it is broader than the DJIA.

      I'm not liberal. I'm actually just anti-evil, OK? - Elon James White

      by Satya1 on Wed Feb 12, 2014 at 07:00:26 AM PST

      [ Parent ]

      •  The reports are a vestige from the days (0+ / 0-)

        when local news did economic reporting. They always reported the stock market. As the actual reporting stopped they keep reporting the DJIA just because they have always done it.

        Much like the local sportscasts, for the most they are much smaller if they exist at all.

        Local news is pretty much weather porn and crime these days.

  •  It is useful for cultural anthropology (12+ / 0-)

    The fact that AIG and Walmart gained a spot as leaders in their industrial sector tells you how messed up our definition of what a successful business is these days.

    "I am not interested in picking up crumbs of compassion thrown from the table of someone who considers himself my master. I want the full menu of rights." (From "You Said a Mouthful" by Bishop Desmond Tutu - South African bishop & activist, b.1931)

    by FiredUpInCA on Wed Feb 12, 2014 at 07:32:45 AM PST

  •  I look at the Dow and the NASDAQ composite, (3+ / 0-)
    Recommended by:
    mungley, left of center, FarWestGirl

    but only because they seem to provide a decent snapshot of market behavior for that day.  But for long-term, I completely ignore them.  For that, for the reasons you've cited, the Dow is utterly useless.

    I am become Man, the destroyer of worlds

    by tle on Wed Feb 12, 2014 at 07:41:28 AM PST

  •  S&P 500 (5+ / 0-)

    The Dow was more useful in times past because it represented a huge percentage of US GDP.  Today, no so much.  There is no way to represent a $17 Trillion economy with 30 companies.  The S&P is a much better index these days and as Warren Buffett is well on the way to proving, the S&P can beat even hedge funds.  

    It is well that war is so terrible -- lest we should grow too fond of it. Robert E. Lee

    by ksuwildkat on Wed Feb 12, 2014 at 07:49:44 AM PST

    •  Now this is ... (0+ / 0-)

      ... the comment I was looking for.  Thanks for putting the 17 trillion dollar figure in there.  I don't have a comment on which indices may be better or more representative of the market.

      I'm just looking for some info on how much of that 17 trillion actually has any exposure to the 'stock market'.

      I had heard that all of the traded  money is only a small portion of the actual value in the economy or GDP.  Is the 'stock market' 15 % of the economy ?

      Prophecy is not an exact science.

      by willy be frantic on Wed Feb 12, 2014 at 11:44:00 AM PST

      [ Parent ]

      •  Depends on how you figure it (2+ / 0-)

        So in theory the vast majority of the US economy is represented in some way by the stock market.  Theory.

        If you are a local car dealer the cars you sell are reflected in the auto makers stock.  Local grocery store is reflected in some publicly traded company at some point.

        But what about really small businesses?  Lets say I am a photographer and I do all of my printing through a small private printing company.  My gear purchases (cameras, lenses, strobes) might get captured but my product  - and most of my contribution to GDP - is not.  And lets say I buy a strobe directly from a foreign company?  Not captured in US GDP at all but still a factor in the overall economy.

        The S&P 500 has a total Market Capitalization of roughly $11 Trillion but market cap and GDP are not the same.  Also, Government spending is a major component of GDP and while some is captured in the stock marked most is not.  

        I dont know the answer about how much of the GDP can be reflected in the stock market but I would imagine its more than 15%.

        It is well that war is so terrible -- lest we should grow too fond of it. Robert E. Lee

        by ksuwildkat on Wed Feb 12, 2014 at 02:10:48 PM PST

        [ Parent ]

        •  Thank you (0+ / 0-)

          Economics is a hard to understand thing, as compared to say ... string theory.

          I do appreciate your answer.

          Just to take a bit of a tangent, is it true that if all the economists were laid end to end they wouldn't reach a conclusion ?

          Prophecy is not an exact science.

          by willy be frantic on Wed Feb 12, 2014 at 05:21:25 PM PST

          [ Parent ]

          •  LOL (0+ / 0-)

            I started out as an econ major and switched to Political Science.  Less opinion in Poly Sci  :)

            Truthfully I wish I had stuck it out in econ and have considered going back for an econ Masters.  

            Read Freakanomincs and Super Freakonomics.  Great books.

            It is well that war is so terrible -- lest we should grow too fond of it. Robert E. Lee

            by ksuwildkat on Thu Feb 13, 2014 at 05:33:18 AM PST

            [ Parent ]

  •  I prefer more tightly focused economic indices (3+ / 0-)

    Like the inside of my refrigerator.

    "I am not interested in picking up crumbs of compassion thrown from the table of someone who considers himself my master. I want the full menu of rights." (From "You Said a Mouthful" by Bishop Desmond Tutu - South African bishop & activist, b.1931)

    by FiredUpInCA on Wed Feb 12, 2014 at 07:55:12 AM PST

  •  I thought (2+ / 0-)
    Recommended by:
    wilderness voice, FarWestGirl

    you were going to point out how it only represents a very small slice of stocks, and only the most successful at that.

    None are so hopelessly enslaved, as those who falsely believe they are free. The truth has been kept from the depth of their minds by masters who rule them with lies. -Johann von Goethe

    by gjohnsit on Wed Feb 12, 2014 at 08:21:32 AM PST

    •  A small slice can mimic the performance (2+ / 0-)
      Recommended by:
      left of center, FarWestGirl

      of a larger whole. (Think about political polling or other examples of statistical sampling.) However, the DOW is not representative of the whole market. It would be like polling only Connecticut and extrapolating the result to the entire USA.

      Did you ver notice how har it is totype accurately on an iPad?

      by RudiB on Wed Feb 12, 2014 at 08:28:02 AM PST

      [ Parent ]

  •  Thank you for your fine analysis (2+ / 0-)
    Recommended by:
    left of center, FarWestGirl

    I've always hate DJIA being dutifully reported because I felt that it aggrandized corporations and conflated how well they were doing and not how well the workers were doing.

    Now, I hate it for a whole different reason! Of course, these numbers are cooked in their crooked game of risk.

    We have it within our power to make the world over again ~ Thomas Paine

    by occupystephanie on Wed Feb 12, 2014 at 08:48:02 AM PST

  •  How is changing the stocks "gaming?" (1+ / 0-)
    Recommended by:

    Companies are dynamic organizations. You can't compare, for example, Kodak today to what it was in the 70s and 80s. I agree that it is an imperfect indicator, but it does have value.

  •  Where are all the "Investors"? (5+ / 0-)

    The Dow Jones average has been meaningless for a number of years now.  Ever since the speculators took over the trading houses with their high-speed electronic trading, there has been no room for investors.
    So if the news reports a rise in the DJIA, that means the the speculators have been busier than usual.  
    I no longer play in that losing game.   If you're a little guy, the best advice is "don't invest any more money than you're prepared to lose".  

  •  Um: (0+ / 0-)
    Hewlett-Packard in decline? Bring in Visa!  AIG folds?  Replace them with Kraft!  Wait, Kraft starts to stumble a few years later
    AIG is alive and well.

    © grover

    So if you get hit by a bus tonight, would you be satisfied with how you spent today, your last day on earth? Live like tomorrow is never guaranteed, because it's not. -- Me.

    by grover on Wed Feb 12, 2014 at 11:32:44 AM PST

  •  The Dow 30 Is a Bellwether, No More (1+ / 0-)
    Recommended by:
    Ian S

    Since the Dow 30 is a price-weighted amuse-bouche of marquee-worthy stocks, all it can do is give a hint as to investor interest in U.S. equity in general.

    For that matter, the S&P 500 is simply a market cap-weighted sampling of 500 stocks of particular interest to institutional investors. The NASDAQ is similarly a sample of interesting and/or headline-worthy stocks trading on the NASDAQ exchange.

    There is an active selection component to these indexes that makes them less useful to asset managers as benchmarks. Having said that, the S&P 500 is sufficiently popular that replication index funds and ETFs are available for instant exposure to those 500 "interesting" stocks.

    The Russell 3000 and the even-broader Wilshire 5000 Total Market Index are designed to be intrinsically passive, unselected representations of the U.S. stock market. Both are cap-weighted, reflecting free float of the stocks in question (bear in mind that some stocks do not have ALL of their shares fully available on the market; some shares may be closely-held or cross-held by related firms). The Russell 3000 is the top 3000 stocks of U.S.-headquartered (and usually U.S.-incorporated) by market cap; the Wilshire 5000 consists of all U.S.-headquartered (and usually U.S.-incorporated) stocks trading in the U.S. in U.S. dollars for which electronic pricing is available. Stocks move in and out of these broader indexes pretty much as of the first month-end they start trading.

    It is practically impossible to run a full-replication index fund based on the 3000 or the 5000; management firms use sampling techniques to track these indexes within acceptable tracking error bands (stratified sampling, judicious use of derivatives, etc.).

    Why does this all matter? Simple economics. The U.S. stock market is highly efficient, and it's increasingly difficult to outperform "The Market", so frankly it's prudent for investors to simply Hold The Market in the form of index funds or ETFs.

    Good investors exploit price inefficiencies. Volatility in asset prices is NOT a bad thing, assuming it's volatility that can be used (i.e., the underlying causes can be understood and exploited). The reason hedge funds have done poorly in recent periods is just that: The recent volatile markets have been caused by risk factors that can't be easily exploited or timed, and markets have moved in stubborn lockstep at precisely the wrong times. It's been hard.

    What have I done in my humble 401(k)? Diversify, diversify, diversify, and hold the long view. My time horizon is 15-20 years, and I'm sticking to a slightly stock-heavy asset mix. My bond exposures held me back a bit in 2013, but I'm willing to forego a certain amount of asset growth for a bit of a tail hedge in the event of another stock hiccup. I've done fine.

    -8.75,-8.00. Equal rights for ALL. Nothing less. RIGHT. NOW.

    by CajunBoyLgb on Wed Feb 12, 2014 at 11:53:04 AM PST

    •  Yeah, bond funds really sucked last year... (0+ / 0-)

      but have perked up a bit lately. Holding for the long term and not panicking at a downturn in the market works wonders, I've found.

      Just another faggity fag socialist fuckstick homosinner!

      by Ian S on Wed Feb 12, 2014 at 01:22:30 PM PST

      [ Parent ]

  •  It's not rigged (0+ / 0-)

    It's just bad quantitative analysis.

    The DJIA has only 30 stocks, picked by a very traditionalist organization (even pre-Fox).  They do not properly adjust for changes in stock value, weight the index for capitalization, or stagger stocks in and out.  The advantage of the DJIA is that you can compute it by paper and pencil.

    The nearest indicative index is the S&P 500.  It's still too small and too biased toward large-cap stocks.  It is, however, properly weighted for valuations and changes to it, and takes things like dividends into account.  It has the advantage of being ubiquitous and of being calculated in near real time; a "proper" broad index may have more of a lag (and has its own methodological issues, e.g. what do you do about thinly traded stocks).

    But if you go that route, you are essentially endorsing market-efficiency theories, which basically suggest that there's no trading strategy that can beat the "market portfolio" (which is tightly defined by financial economists).  There is some dispute about how "efficient" the market is.  For example, the "theoretical" model states that insider trading won't work: there are numerous empirical examples to the contrary.  On the other hand, no charting system has ever shown any predictive value, and only one investor -- Warren Buffet earlier in his career before he had fifty bazillion dollars under management -- has ever beat the markets with fundamental analysis.  Buffett is the exception that proves the basic rule (his ability to do so made him a billionaire, if anyone could do this, we'd all be billionaires).

    So why does this matter?  Modern financial theory is at direct odds with the fundamental values of economic conservatism.  To them, success in the stock market is, after all, like everything else, a statement about individual morality, not an impersonal market reflecting the consensus of everyone who trades there.  The DJIA, which is useless as a trading instrument and a fairly weak approximation to the state of the market, is a symbol of that conservative value system.

  •  The DOW is VERY meaningful (0+ / 0-)

    for people who have substantial money in the stock market.  Particularly if their money is in index funds that closely track the DOW.    Those who do have made extraordinary profits over the Obama years, and also did well under Clinton.  Bush was a loss.  

    The DOW is not entirely meaningless, but I would agree that it does not reflect general economic health.  

  •  I wouldn't say it's meaningless but... (0+ / 0-)

    it's certainly been eclipsed by other indices as an indicator of "the market." What I find fascinating is the mushrooming of mutual funds, Exchange Traded Funds, and Exchange Traded Notes and some of the esoteric approaches taken by them. For most folks, a simple fund like SPY gives good cost-effective exposure to the US stock market. But for more adventurous souls, there are odd beasts like the index VIX which attempts to model "market volatility" and funds which try to mimic it or even an inverse of it. Nimble, savvy investors can make a good return but when all is said and done, it's actually pretty hard to beat an average like the S&P500 and the funds based on it.

    Just another faggity fag socialist fuckstick homosinner!

    by Ian S on Wed Feb 12, 2014 at 01:18:44 PM PST

  •  I just LOVE Elvis singing about Wall St! (0+ / 0-)

  •  It's like Obamacare (0+ / 0-)

    It sucks, basically, but it's a hell of a lot better than nothing.

  •  When the bubble burst it going to be meaningless (0+ / 0-)

    When the bubble burst it going to be meaningless all right
    The stock market is the biggest (Fed by the Fed) bubble boy in history...

  •  Nobody in finance looks at the DJIA. (0+ / 0-)

    For two reasons: the committee that decides on its composition looks at whether a company has made newsworthy recent moves (public ones, that is), and that's a mighty poor criterion, and because if you took the original DJIA portfolio and just held on to it over the life of the index, instead of following along with committee decisions, the resulting portfolio would have made you twice as much money.

    In finance, even mentioning the DJIA is a way to diminish your standing among your colleagues.

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