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PSA: The Dow Jones industrial average is a terrible measure of the stock market. It tracks just 30 stocks, some which have an outsized influence on the measure.
by zizee 7y ago
PSA: The Dow Jones industrial average is a terrible measure of the stock market. It tracks just 30 stocks, some which have an outsized influence on the measure.
This is not to say the stock market is not in freefall, but there are much better indexes to track general market movement.
- bretpiatt 7y agoToday it correlated with the better indexes. DOW (-12.93%): [1] S&P 500 (-11.98%) https://finance.yahoo.com/quote/%5EGSPC?p=^GSPC https://finance.yahoo.com/quote/%5EGSPC?p=^GSPC [2] NASDAQ (-12.32%) https://finance.yahoo.com/quote/%5EIXIC?p=^IXIC https://finance.yahoo.com/quote/%5EIXIC?p=^IXIC [3] Russel 2000 (-14.27%) https://finance.yahoo.com/quote/%5ERUT?p=^RUT https://finance.yahoo.com/quote/%5ERUT?p=^RUT
- binarymax 7y agoAlso: NYSE Composite (-11.84%) https://finance.yahoo.com/quote/%5ENYA?p=^NYA&.tsrc=fin-srch https://finance.yahoo.com/quote/%5ENYA?p=^NYA&.tsrc=fin-srch
- mdgrech23 7y agoI wouldn't say it's terrible but if you're looking for a quick way to assess the market there are better options such as the Wilshire 5000 index. That being said that's crashing too so it doesn't really matter. The market is crashing folks, thats the reality of the situation.
- legitster 7y agoThe main benefit is that it has been around a long time, so it's somewhat useful for broader historic trends.
- nabla9 7y agoMost of the SP500 movements come from small number of companies too. Dow Jones is bad index but the narrow number of companies is not the worst part. DJIA is price-weighted index which is completely arbitrary and there is no reason for that. They can't add Berkshire Hathaway into the index without completely changing the rules. BRK-A price is so high. Index would track only BRK-A after that.
- jedberg 7y agoI'm not sure why they don't add BRK-B though.
- kolbe 7y agoIn my opinion, BRK shouldn't really be in the S&P 500 anyway. I don't get why a company that owns AAPL should be in an index that already owns AAPL.
- prewett 7y agoWell, BERK-A is the canonical class. But Berkshire Hathaway is practically an index of its own, being a big, giant holding company. I don't think it belongs in any index.
- KMag 7y ago"DJIA is price-weighted index which is completely arbitrary and there is no reason for that." Well, I believe the reason is that it's much easier to calculate on hand-cranked mechanical adding machines. There is a reason, but it's obsolete.
- all_blue_chucks 7y agoPSA: The Dow Jones is a very good proxy for the stock market as a whole. If it were not people would have stopped paying attention to it years ago.
- rupert1234 7y agoPSA: No, wrong. It might not be the very best but it is absolutely not terrible. A cursory look at the correlation over time could have told you this.
- quantgenius 7y agoActually right now the DJIA might be a _better_ measure of the large cap market than the S&P 500. The problem with price weighted indices is that at the top of bubbles they wildly overweight the recent winners. The performance of the S&P in recent times is mostly just the performance of the trillionaire companies. The same thing happened in 2000 when approx 40% of S&P returns was the returns of the Internet (as opposed to the larger tech) sector and in 2007 when financials had an outsized effect. I wonder how much of the performance of GOOG/FB/AMZN is VCs funnelling cash to overvalued startups building a brandname who then funnel said cash to GOOG/FB/AMZN for advertising and overpriced AWS services? Not that I think the trillionaire companies are going anywhere but I suspect they may be hit harder than people think they will be.