Dow changes raise questions about relevance
Traders work on the floor of the New York Stock exchange on May 7, 2012 in New York City.
There’s a shakeup in the 30 stocks that make up the Dow Jones Industrial Average. Alcoa, Bank of America and Hewlett-Packard will be out of the mix later this month. Nike, Goldman Sachs and Visa will be in.
The Dow bills itself as a broad benchmark, a listing of America's most prominent firms, says Bill Chambers, who teaches finance at Boston University. But there are disclaimers. Plenty of them.
“No group of 30 companies is ever going to reflect what is happening in the country," Chambers says. "They still are really quite underweighted in terms of the technology side of things."
Chambers says one of the biggest problems is that the Dow values companies based on their stock price, not on their total market capitalization. And the Dow is old, antiquated even, says Tim Ghriskey, the chief investment officer of Solaris Asset Management.
“It really was your grandmother's index," he says. "It’s not what institutional investors use today.”
Then why pay attention to the Dow at all? Well, because it’s old, it’s a way to compare the past and present. Consumers follow the Dow closely. They use it as a benchmark. And consumers have a huge impact on the economy.
“All you need to do is see a five-inch high newspaper headline that says Dow falls 500 points to ruin retail sales in a given weekend,” says Mark Hamrick of bankrate.com.