If you’re just getting back from summer vacation and catching up on your markets news, you might have seen a few references to the Dow Jones Industrial Average’s bad day on July 31. The stock gauge fell 317 points, “wiping out the year’s gains.”
That’s true, but it’s also pretty much irrelevant. Of all the widely cited equity benchmarks, the Dow Jones might be the flimsiest, and it is certainly a poor proxy for the state of the broader economy. The Dow’s flaws are well known: It tracks just 30 companies, and it does so based on price, resulting in a lot of kooky additions and subtractions and exclusions for reasons other than the components’ actual value as financial bellwethers. As of Aug. 18, the Dow is up 1.5 percent for the year. The other stock indices tell a different story: The Standard & Poor’s 500 is up 6.7 percent; the Nasdaq Composite is up 7.8 percent; and the Russell 3000 is up 6.1 percent. Glance at those numbers, and you draw much rosier conclusions about the health of corporate America.
For all its shortcomings, the Dow has usually tracked pretty closely with the broader and more reliable S&P 500, which is weighted by market cap; that’s one of the reasons it has remained a shorthand for the state of the stock market. That’s changing now. The two benchmarks are now farther apart than at any point in the past five years, as this chart shows:
The Dow has been dragged down by its largest components—Visa, with the heaviest weight on the index, has lost 5 percent this year. The second and third-heaviest members, IBM and IBMGoldman Sachs, are up 1.6 percent and down 2.4 percent, respectively. Meanwhile, Apple, the largest component in the S&P 500, is up more than 24 percent. Lots of smart investors and market commentators are talking about whether stocks are valued too highly right now, but relying on the Dow isn’t a good way to start the conversation.