Isn’t it time to dump the Dow? Currently, the market is in sell off mode and the business channels are breathlessly reporting the fall in the Dow. However, I am less interested in the Dow than in how the overall market is behaving. Concentrating on the Dow is for rookies. Pros look at broader indexes and focus on stocks not on the Dow. So isn’t it time to dump the Dow?
The Dow is the closest watched (by much of the public and the business media) indicator of the stock market. Yet the Dow is made up of only 30 companies. It started out in 1884 comprised of nine railroads and two industrial companies. The value of the Dow is not the actual average of the prices of its component stocks, but rather the sum of the component prices divided by a divisor, which changes whenever one of the component stocks has a stock split or stock dividend, so as to generate a consistent value for the index.
The components of the Dow change over time as some companies gain prominence and others lose prominence. Yet companies such as Amazon, Alphabet, Tesla and meta are not on the Dow. There are over 15,000 publically traded companies in the US with about 5,000 traded on the exchanges. Now it is understandable why there was such a small number on the Dow initially given the logistical difficulties of calculating a composite average for all publically traded firms. But that is no longer a problem. The Dow is top heavy with the highest priced stocks carrying more impact than the lowest priced stock. Recently, the biggest company in market cap Apple surged with the Dow falling. How could this happen? Its because Apple is not included in the Dow! So the question of the day is why not ditch the Dow and do something akin to the S&P 500 which accounts for market capitalization or the Russell 2000? Better yet, since we have the technology, why not include all stocks traded on all the major exchanges and have a weighted market cap average? Now that would be an accurate representation of what is happening in the market rather than citing an outdated anachronism of the past.