The Dow is a misleading and anachronistic statistic, it’s time to move on
The Dow Jones Industrial Average is like the sausage you bought from that street vendor last Tuesday. It smells a bit off and you’re only kind of sure that green splotch near the bottom is relish, but it’s probably fine.
Well, be warned—learning what the Dow is made of might make you feel a bit queasy.
The Dow Jones Industrial Average has gotten a lot of attention lately. It’s been used as a barometer for President Trump’s policies, and it’s been celebrated for growing, past 20,000.
The Dow Jones Industrial Average was created in 1896, and it shows. For one thing, it’s made up of only 30 companies. By contrast the S&P 500, another index used to track the economy, is comprised of 500.
Not only are there a handful of companies, but they’re probably not even the right ones. After dominating the market for decades, Apple, one of the largest companies in the world, was added to the Dow only two years ago. Google (or its parent company Alphabet, for you sticklers), Facebook, and many other prominent companies, especially in the tech sphere, are nowhere to be found. Looking at the list of companies that make up the Dow, it’s hard to argue that it offers an accurate picture of the American economy.
The Dow is also weighted by the stock prices of the companies, not their actual size or impact on the economy. This means that some technical operations will cause the Dow to shift, even when values of the companies are exactly the same.
In fairness, the S&P has its own problems, and there are even issues with how we calculate gross domestic product (GDP). Honestly, any financial measurement we could dream up at this point would be leagues away from perfect. So why pick on the Dow?
Basically, because it’s not useful.
GDP doesn’t give a perfect picture of the economy, but it’s better than most other methods. Not only does the Dow not explain the economy better than other systems, it will make you a lot less money. If you were an investor, you’d have been worse off for investing in the Dow over the S&P 500 at pretty much any point since the S&P 500 was created in the 1920s.
And yet, it still gets press. Logically, this kind of attention prompts people all over the world to view the Dow as legitimate.
In a time pervaded by “alternative facts” and general disagreement on topics as basic as whether or not the economy is doing well, we owe it to people to present useful information.
In the media, the Dow Jones Industrial Average is referenced everywhere. Maybe reporters like it so much because it was created by a journalist, or maybe because it’s so simple.
Well, Albert Einstein said you should always make things “as simple as possible, but no simpler.” The Dow Jones has crossed that line and then some, and it’s time to realize that and move on.