Is the Dow Jones Industrial Average a useful metric?

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bert09
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Is the Dow Jones Industrial Average a useful metric?

Post by bert09 » Thu Jun 14, 2018 10:37 am

I feel like when you see any sort of cable TV shows talking about the stock market, they always point out how much "the Dow" went up or down. I never really understood what this meant when I was younger, and after looking into it, I am still confused about what this really means.

From wikipedia:
> The value of the Dow is not a weighted arithmetic mean and does not represent its component companies' market capitalization, but rather the sum of the price of one share of stock for each component company.

> The Industrial portion of the name is largely historical, as many of the modern 30 components have little or nothing to do with traditional heavy industry. Since the divisor is currently less than one, the value of the index is larger than the sum of the component prices.

This makes absolutely no sense to me - why does anyone care about these seemingly arbitrarily picked 30 components? On top of that, the fact that it is price weighted seems insane to me. I don't really get why the media fixates on what seems like an antiquated and arbitrary heuristic versus something like the S&P 500.

lack_ey
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Re: Is the Dow Jones Industrial Average a useful metric?

Post by lack_ey » Thu Jun 14, 2018 10:41 am

It's useful in the sense of being more representative of the market than you might think for something that has such glaring problems as you mention.

There's not really any reason to use it over other indexes except for tradition and continuity in a dumb sense.

SagaciousTraveler
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Re: Is the Dow Jones Industrial Average a useful metric?

Post by SagaciousTraveler » Thu Jun 14, 2018 10:42 am

To me, no. Most people think the DOW is the Stock Market, so news outlets just go with it.

When I check in on the market, I pay more attention to the S&P.

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greg24
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Re: Is the Dow Jones Industrial Average a useful metric?

Post by greg24 » Thu Jun 14, 2018 10:48 am

The Dow is a historical anacronism.

But the long term correlation to the SP500 is 0.9557, according to this article: https://www.marketwatch.com/story/the-d ... 2017-07-06

So, while its use is frustrating, the Dow is a good proxy for the market returns.

A bigger pet peeve of mine is the media using "points" as a metric. The Dow is up 17 points! The SP500 is down 83 points! Points are meaningless, give me a percentage.

bert09
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Re: Is the Dow Jones Industrial Average a useful metric?

Post by bert09 » Thu Jun 14, 2018 11:16 am

greg24 wrote:
Thu Jun 14, 2018 10:48 am
A bigger pet peeve of mine is the media using "points" as a metric. The Dow is up 17 points! The SP500 is down 83 points! Points are meaningless, give me a percentage.
They don't mean basis points do they? Also something I am not clear on - because basis points are a change in percentage right?

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greg24
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Re: Is the Dow Jones Industrial Average a useful metric?

Post by greg24 » Thu Jun 14, 2018 11:21 am

They don't mean basis points. One basis point is 0.01%.

For example, the Dow currently stands at 25,187.09. It is down 14.11 points today. Financial news will commonly say "the Dow is down 14 points today!" Which is 0.056%.

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Smorgasbord
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Re: Is the Dow Jones Industrial Average a useful metric?

Post by Smorgasbord » Thu Jun 14, 2018 11:47 am

Sure, it's a useful metric in that it has a long record so modern events can be put into a larger historical context.

Glockenspiel
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Re: Is the Dow Jones Industrial Average a useful metric?

Post by Glockenspiel » Thu Jun 14, 2018 11:50 am

Mildly useful, but very misleading. I also hate that they only report points and wish they'd report the S&P 500 instead. If a news outlet reports on only one stock index, it is always the Dow, and I think it's stupid.

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Re: Is the Dow Jones Industrial Average a useful metric?

Post by alfaspider » Thu Jun 14, 2018 11:54 am

greg24 wrote:
Thu Jun 14, 2018 10:48 am
The Dow is a historical anacronism.

But the long term correlation to the SP500 is 0.9557, according to this article: https://www.marketwatch.com/story/the-d ... 2017-07-06

So, while its use is frustrating, the Dow is a good proxy for the market returns.

A bigger pet peeve of mine is the media using "points" as a metric. The Dow is up 17 points! The SP500 is down 83 points! Points are meaningless, give me a percentage.
Exactly. It's closely correlated enough that it's not a big deal. The historical factor can be useful. Due to the way the media reports things, I can recall what the Dow was at (roughly) 10 years ago. I can't recall what the S&P500 was at.

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Smorgasbord
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Re: Is the Dow Jones Industrial Average a useful metric?

Post by Smorgasbord » Thu Jun 14, 2018 11:57 am

I would also add that, in my opinion, reporting the SP500 isn't useful at least 95% of the time.

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Re: Is the Dow Jones Industrial Average a useful metric?

Post by Whatyear? » Thu Jun 14, 2018 12:08 pm

I watch both the Dow and the S&P 500 to figure out when to update my portfolio tracker and projections - I only bother if either of them is up at least 1% from the last time I updated.

The news station I listen to always reports points and percentage movements on both.

Shamb3
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Re: Is the Dow Jones Industrial Average a useful metric?

Post by Shamb3 » Thu Jun 14, 2018 12:11 pm

No and it is obnoxious that they quote intra-day trading value.

If they wanted to convey useful information S&P 500 is up down x% for the past week, month, year might be better.

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Re: Is the Dow Jones Industrial Average a useful metric?

Post by SimpleGift » Thu Jun 14, 2018 12:20 pm

bert09 wrote:
Thu Jun 14, 2018 10:37 am
I don't really get why the media fixates on what seems like an antiquated and arbitrary heuristic versus something like the S&P 500.
It is a bit irritating and is just an artifact of history. Much like the U.S. not adopting the metric system, despite it being the global standard these days. :annoyed
Cordially, Todd

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Re: Is the Dow Jones Industrial Average a useful metric?

Post by Valuethinker » Thu Jun 14, 2018 12:50 pm

SimpleGift wrote:
Thu Jun 14, 2018 12:20 pm
bert09 wrote:
Thu Jun 14, 2018 10:37 am
I don't really get why the media fixates on what seems like an antiquated and arbitrary heuristic versus something like the S&P 500.
It is a bit irritating and is just an artifact of history. Much like the U.S. not adopting the metric system, despite it being the global standard these days. :annoyed
.... ish.

The adherence to something which is neither the Imperial system nor the SI (Metric) is annoying, to say the least. (some politicians seriously suggested a benefit of Brexit is to be able to revert to Imperial system. Said politicians never were responsible for engineering design or maintenance roles where peoples' safety was a concern... I note that even the US military appears to use SI measurements- -calibres in mm, ranges in meters (if not metres ;-)) etc.).

DJIA has the virtue of dating back to the 1880s. Sometime around 1890, it was set = 100. (I forget the exact date).

Thus, we can work out the price return since 1890 for stocks in the USA. Total return indices are also out there.

That's unique, AFAIK, for stock indices. All the rest, even the UK ones, are backward constructed. This is an actual measure where we can look it up in a microfiche of an old newspaper-- and quite unique, AFAIK.

So DJIA does have a place. The good news is, in the long run, it more or less tracks the S&P500, as I understand it.

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JoMoney
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Re: Is the Dow Jones Industrial Average a useful metric?

Post by JoMoney » Thu Jun 14, 2018 1:04 pm

It has a longer continuous history than S&P's index, and has roughly captured the markets performance despite being an odd weighting of a haphazard assortment of stocks. It's considered a bit of a 'blue chip' index. It has options and futures that trade on the index itself as well as the individual components. It's used in several old trading schemes, such as Dow Theory , Dogs of the Dow and it's long history used in technical analysis charting techniques.

Incidentally from 1926 through 2017 , according to this DJIA w/Dividends calculator , the DOW had an inflation adjusted CAGR of 6.9%
Calculating the CAGR of this chart using the Ibbotson data (S&P index) comes up with 7.0%
Which is pretty darn close given the differences in the constituents of the indices.
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Re: Is the Dow Jones Industrial Average a useful metric?

Post by Ice-9 » Thu Jun 14, 2018 1:27 pm

If I could change the media, instead of the Dow, S&P, and NASDAQ, I'd have them report "Total (US) Stock Market, Total International, and Total Bond Market."

But I can't, and I don't see the media changing their standard list of three for a very long time.

+1 completely on the use of points as a metric rather than percentage. I don't get why anyone would find the points more useful.

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nisiprius
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Re: Is the Dow Jones Industrial Average a useful metric?

Post by nisiprius » Thu Jun 14, 2018 1:37 pm

The fact that the DJIA is a useful metric illustrates how easy it is to get drawn into hairsplitting and "angels dancing on the head of a pin."

The reason why it continues to be quoted is that it has a longer continuous history than any other measure. The S&P 500 (contrary to what is often stated) only goes back to 1957. There is a composite index that preceded it, that had variable numbers of stocks in it--90 at the time it was superseded by the S&P 500--but I'm not sure what to call it; it can't be the "S&P composite" because Standard and Poor's did not exist before 1941. I imagine it was Standard's index, but I don't know.

Also, of course, many peoples' memories are anchored to specific past values of the DJIA. I can remember specifically that the DJIA dropped from about 14,000 to 13,000 in 2008, but I can't for the life of me remember the comparable numbers for the S&P 500.

An analogy that appeals to me is the meteorological records kept by the Blue Hills Observatory. They are the longest continuous meteorological records in the US, I think--started in the 1870s. And to ensure continuity, they use the same instruments that have been used all along, they measure barometric pressure with barometers that are literally filled with mercury, and they measure it in inches, not in centimeters--because it is more valuable to have the records be continuous and exactly comparable than to have them be "modern."
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nisiprius
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Re: Is the Dow Jones Industrial Average a useful metric?

Post by nisiprius » Thu Jun 14, 2018 1:52 pm

It would be interesting to do this for a longer period of time, but for now I'll just do what was easy. From 1985 to 2018, the Dow Jones Industrial Average has always been in the range 7X to 10X the S&P.

Image
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Re: Is the Dow Jones Industrial Average a useful metric?

Post by MotoTrojan » Thu Jun 14, 2018 1:55 pm

Smorgasbord wrote:
Thu Jun 14, 2018 11:57 am
I would also add that, in my opinion, reporting the SP500 isn't useful at least 95% of the time.
What is?

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Re: Is the Dow Jones Industrial Average a useful metric?

Post by jebmke » Thu Jun 14, 2018 2:01 pm

MotoTrojan wrote:
Thu Jun 14, 2018 1:55 pm
Smorgasbord wrote:
Thu Jun 14, 2018 11:57 am
I would also add that, in my opinion, reporting the SP500 isn't useful at least 95% of the time.
What is?
As a retiree I look at three metrics:

Is the pile large enough to get me (and spouse) to the end, making reasonable assumptions about future asset returns and withdrawals.
Is the mix of asset deviating from my target in a significant way (and should I act on that).
Are there any unrealized tax assets or liabilities that I need to act on in my taxable accounts.

I do not look at historical performance.

When I was accumulating. The first metric substituted "future savings" for withdrawals.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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Ice-9
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Re: Is the Dow Jones Industrial Average a useful metric?

Post by Ice-9 » Thu Jun 14, 2018 2:28 pm

nisiprius wrote:
Thu Jun 14, 2018 1:37 pm
Also, of course, many peoples' memories are anchored to specific past values of the DJIA. I can remember specifically that the DJIA dropped from about 14,000 to 13,000 in 2008, but I can't for the life of me remember the comparable numbers for the S&P 500.
Point taken, but how can anyone NOT remember that the low of the S&P 500 in 2009 was 666! :twisted:

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Re: Is the Dow Jones Industrial Average a useful metric?

Post by truenorth418 » Thu Jun 14, 2018 2:36 pm

SagaciousTraveler wrote:
Thu Jun 14, 2018 10:42 am
To me, no. Most people think the DOW is the Stock Market, so news outlets just go with it.

When I check in on the market, I pay more attention to the S&P.
Correction: Most news outlets just go with it, so most people think the DOW is the Stock Market.

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Re: Is the Dow Jones Industrial Average a useful metric?

Post by columbia » Thu Jun 14, 2018 2:39 pm

Looking over the list:
https://money.cnn.com/data/dow30/

Is it sufficiently different diversified? No.
Is it better than stick picking? Absolutely.

Should anyone bother to track its performance and care about daily movements? I certainly don’t.

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Re: Is the Dow Jones Industrial Average a useful metric?

Post by 9-5 Suited » Wed Jun 20, 2018 10:21 am

greg24 wrote:
Thu Jun 14, 2018 10:48 am
The Dow is a historical anacronism.

But the long term correlation to the SP500 is 0.9557, according to this article: https://www.marketwatch.com/story/the-d ... 2017-07-06

So, while its use is frustrating, the Dow is a good proxy for the market returns.

A bigger pet peeve of mine is the media using "points" as a metric. The Dow is up 17 points! The SP500 is down 83 points! Points are meaningless, give me a percentage.
IMO they do this to push their particular agenda. The other day there was an article that highlighted an 83 or 85 point drop in the Dow as the basis for a huge political critique. The article couldn’t even have been written with the headline of “Dow is down 0.3%”. To boot, the graphic on the article showed a huge recession-like negative trend line :)

Most mainstream market news, unfortunately, is confirmation bias driven garbage.

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Re: Is the Dow Jones Industrial Average a useful metric?

Post by michaeljc70 » Wed Jun 20, 2018 10:39 am

I look at the S&P 500 to get a sense of what the market is doing in a broad sense. The Dow is way to few companies, and frankly most aren't industrial anymore so the name is a misnomer. I wish they would use the TSM, but nobody on the news or media shows that often.

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Re: Is the Dow Jones Industrial Average a useful metric?

Post by rgs92 » Wed Jun 20, 2018 10:47 am

It seems like most people I talk to don't even know what the S&P is, but everyone knows the Dow and think the Dow is synonymous with the stock market.
(I see that Sagacious* above said a similar thing after I scrolled up a bit.)
It is sort of interesting how much the Dow correlates with the S&P, which is amazing when you think about it since they are calculated so differently.

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JoMoney
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Re: Is the Dow Jones Industrial Average a useful metric?

Post by JoMoney » Thu Jun 21, 2018 8:35 am

I was just watching a "news" program where the host commented that the Dow is several hundred points off it's high for the year.
The commenting guest, a well regarded economist, pointed to the NASDAQ as reaching all time highs.
TV uses lousy market indicators.
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Re: Is the Dow Jones Industrial Average a useful metric?

Post by acegolfer » Thu Jun 21, 2018 8:41 am

I agree but the same can be said with S&P500, which is a better measure of the market. In future, people will say why arbitrarily pick 500 out of 10k+ companies.

It takes years and years to educate the public. For example, MPT has been around for 50+ years.

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Re: Is the Dow Jones Industrial Average a useful metric?

Post by CyclingDuo » Thu Jun 21, 2018 8:14 pm

bert09 wrote:
Thu Jun 14, 2018 10:37 am
I feel like when you see any sort of cable TV shows talking about the stock market, they always point out how much "the Dow" went up or down. I never really understood what this meant when I was younger, and after looking into it, I am still confused about what this really means.

From wikipedia:
> The value of the Dow is not a weighted arithmetic mean and does not represent its component companies' market capitalization, but rather the sum of the price of one share of stock for each component company.

> The Industrial portion of the name is largely historical, as many of the modern 30 components have little or nothing to do with traditional heavy industry. Since the divisor is currently less than one, the value of the index is larger than the sum of the component prices.

This makes absolutely no sense to me - why does anyone care about these seemingly arbitrarily picked 30 components? On top of that, the fact that it is price weighted seems insane to me. I don't really get why the media fixates on what seems like an antiquated and arbitrary heuristic versus something like the S&P 500.
Forget the Dow Jones Industrial Average (only 30 stocks).

Watch the Advance/Decline line for the S&P 500, the Russell, and the Nasdaq.

https://www.cnbc.com/2018/06/21/the-bul ... yptr=yahoo
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