Why We Shouldn’t Be Celebrating The Dow

March 7, 2013 in Daily Bulletin

Business news sources are exuberant because the Dow Jones Industrial Average (DJIA) has hit an alltime high. They should know better writes Jacob Goldstein:

  • Any economist worth their salt knows that you need to take into account inflation adjusted changes in indices over time.
  • If you do that with the latest DJIA numbers then the Dow is currently below its highs in 2000 and 2007. It’d have to rise another 10% to set the record for all-time best.
  • But even if it did it wouldn’t mean much. The DJIA has several weaknesses which make it a really bad economic indicator. (Centives has previously covered some of those reasons here).
  • Other, more useful stock indices such as the S&P 500, are below their highs in both nominal and inflation adjusted terms.

Read more about the weaknesses of the DJIA and more over here.

Source: NPR