Why do we care about The Dow?

February 25, 2012 in Daily Bulletin, Signature

Why do we pay so much attention to the Dow Jones Industrial Average, commonly referred to as The Dow? Adam Davidson writes that it’s because: “In the postwar boom of the 1950s, the economy was growing so fast, and the benefits were so widely shared, that following 30 large American companies was a solid measure of most everyone’s personal economy.” But he argues that it has now become an outdated measure because:

  • The way the Dow is calculated focuses on share price rather than company size. This means that ExxonMobile, one of the largest companies in history, has a smaller effect on the Dow than Caterpillar, a company that is less than a fifth of ExxonMobile’s size.
  • The Dow does not adjust for inflation.
  • In a globalized world, where companies are increasingly making their profits abroad, what’s good for companies on the Dow is not necessarily what’s good for the United States.
  • Charles Dow, the individual who created the index in 1896, himself only checked it infrequently. The Executive Director of Dow Indexes believes that the Dow should not be checked more than once a month.

To read about better alternatives, the history of the Dow, and more of its weaknesses click here.

Source: The New York Times