Why’s the Dow so important?

Marketplace Staff Apr 27, 2007
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Why’s the Dow so important?

Marketplace Staff Apr 27, 2007
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TESS VIGELAND: A lot of things get better with age. Cheese. Wine. Women. And this week, perhaps we could say the same about . . . stocks.

The 125-year-old Dow Jones Industrial Average crossed the 13,000 mark.
But while the Dow had a party, other economic indicators, like the S&P 500, actually fell at points during the week.

So what exactly does the Dow tell us about the economy? To help us sort it all out, we brought in Marketplace’s Bob Moon. Hi, Bob.

BOB MOON: Hey, Tess.

VIGELAND: So, what is so important about us looking at this 13,000 mark for the Dow? How much of this excitement is real, how much is really all about kind of a psychological barrier that we’re breaking through?

MOON: Well, it’s entirely psychological. But that can be important to the market, because we all know that psychology, in many cases, does rule the market. So if you get above this magical, imaginary line, then that can free up the mind to look to the next milestone. You know, I’ve seen some analysts quoted as saying that, “Hey, we could get to 14,000 by the end of the year.” And that really creates its own momentum.

VIGELAND: Let’s talk a little bit about the disconnect that a lot of people see between kind of the market and how people are feeling about the overall economy.

MOON: Well, this really speaks to some of the criticism of the Dow itself. That it’s not really a broad indicator of not only the stock market, but the economy. We’ve got for example, during this latest run-up, Caterpillar — responsible on one day for 26 points of the Dow’s increase. Twenty-six of the points were just for Caterpillar, because Caterpillar happens to be one of the highest-priced stocks in the Dow Jones Industrial Average. And that index is weighted to the higher-priced stocks. So it can really skew the number. And Caterpillar, at the same time that it announced it had fairly decent results, also was warning that not in North America — those good results were over in Europe.

VIGELAND: So why is it that we pay so much attention to this number? I mean, the Dow Jones Industrial Average generally leads the recitation of the numbers. We get very excited when the Dow breaks through, you know, different . . . 11,000, 12,000, 13,000. But it’s only 30 stocks. You compare that to a much more broad S & P 500, which would seem to be more important and more reflective of how the market is doing.

MOON: Tess, I think you’re on to something here. Because that really is the criticism about the Dow that’s been lingering for a number of years now, is why are we paying attention to this index? Which, by the way, was first created back in the late 1800s by one of the founders of the Wall Street Journal. We’ve got computers now, that can actually average all the stocks and tell us how the market is doing. Why are we weighting it toward just 30 stocks? Good question, I wish I had the answer.

VIGELAND: All right, thanks for coming in and helping us sort through this.

MOON: Thank, Tess.

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