What the Dow Tells Today’s Investor

The Dow.

If you have a pulse on the market (or a pulse at all), you’re probably familiar with it.

Scrolling across the bottom of television screens, scrutinized by analysts, and forced upon us by radio deejays, Dow Jones Industrial Average updates are everywhere.

What do these updates mean?

Well, they give us a sense of how stock prices of a few dozen large American companies have changed. Beyond that, it’s hard to tell.

Not the Total Picture

During the postwar boom of the 1950s, the Dow might have been viewed as a strong indicator of how our economy was doing. Today, it’s perhaps a better contributor to investor anxiety than a reliable gauge of portfolio performance.

Keep in mind, the Dow is a collection of just 30 large cap U.S. stocks with a combined market capitalization of approximately $6.8 trillion.

By comparison, the S&P 500 Index includes 505 large cap U.S. stocks with approximately $23.8 trillion in combined market cap. Broader still, the Wilshire 5000 includes about 3,500 U.S. stocks with a combined market cap of over $30 trillion.

The broadest measure of the global stock market is the MSCI All Country World Investable Market Index. Covering over 8,700 large, mid, and small cap stocks in 23 developed and 24 emerging market countries, it has a combined market cap of more than $50 trillion.

While that index is the best reflection of how stocks in a globally diversified investor’s portfolio have performed, you won’t hear it referenced in daily media sound bites.

Putting Point Drops in Perspective

It can be alarming to hear reports of the Dow tumbling, say, 500 points.

But a move of 500 points in either direction is less meaningful now than in the past, largely because the overall index level is higher today than it was years ago.

In 1985, when the Dow was near 1,300, a 500-point drop meant a nearly 39% loss. In 2003, when the Dow was near 10,000, that same drop meant a 5% loss. And in 2018, with the Dow near 25,000, a 500-point drop dwindled to a 2% loss.

A Different Take on the Dow

Despite his pioneering creation, Charles Dow is said to have observed his own index infrequently—once a quarter or once a month, at most.

Today, we know not to draw broad conclusions about the overall health of the market from any narrowly focused stock average.

At Vista, we favor broader measures like the Wilshire 5000 or the MSCI All Country World Index, which reflect the performance of a larger group of companies.

In the meantime, the media will continue to report the Dow’s daily point swings. That’s perfectly fine.

Just remember they’re simply sharing one data point in what amounts to a small drop in the pool for most of our clients.

 

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