Next Up: Dow 10,000? Does Anyone Care?

If you put any weight on psychological thresholds, you are likely awaiting the day when the Dow Jones industrial average crosses the 10,000-point mark. As of Wednesday afternoon, the venerable blue-chip index was just 235 points shy of the mark. Another 2.4 per cent jump will put it there.

But here’s an interesting point: According to Jon Ogg, a blogger at 24/7 Wall Street, the Dow would already be at 10,000 if American International Group Inc. (AIG) and Citigroup Inc. (C) had been allowed to stay in the index – rather than getting the boot over the past year as their share prices shrivelled.

“Changing index components can bite both ways,” Mr. Ogg said.

To be fair, AIG has fallen 57.5 per cent since it was shown the door last September, vastly underperforming incoming Kraft Foods Inc (KFT). But at the Dow, a high share price gives a stock bigger clout in the index, and AIG would have more clout today because a 20-for-1 stock consolidation boosted its share price to about $41 (U.S.). Also helping the stock is the fact that the share price has surged 474 per cent since early March.

This only highlights the impression that the Dow is a bit odd, as we’ve pointed out before in this space. Besides the big-share-price, big-clout phenomenon, the 30 stocks in the index are selected more on personal whim than impersonal criteria.

This has opened the index to some embarrassment over the years, like when it added Microsoft Corp. (MSFT) during the dying days of the technology bubble or when it kicked out Chevron Corp. (CVX) when oil prices were low (the oil producer has since been reinstated, but only after oil recovered).

As well, the index is looking increasingly irrelevant from an investor’s perspective. You would think that a stock would bounce higher after being added to the Dow, thanks to higher visibility and the need among fund managers to own Dow components.

Not so. BusinessWeek, quoting a study by Messod Daniel Beneish of Indiana University’s Department of Accounting and John Gardner of King’s College London, recently pointed out that there is very little impact among stocks added to the Dow or removed from it.

That’s because very little money actually tracks the Dow. The SPDR Trust (SPY) exchange-traded fund that tracks the S&P 500 has $68-billion (U.S.) of assets, versus the $8-billion that tracks the Dow through the DIAMONDS Trust ETF (DIA).

Call these hollow criticisms if you like, but keep in mind that the Dow has been underperforming the broader S&P 500 recently. Over the past 12 months and 5-year periods, the Dow has outperformed on a total return basis, mostly because it tends to have stocks that pay out more general dividends.

But this year, the Dow is up 11.5 per cent versus the 18.1 per cent gain for the S&P 500 – a 6.6 percentage-point difference. Put another way, the S&P 500 has outperformed the Dow by a remarkable 57 per cent this year.

If or when the Dow does hit the 10,000-mark, you’ll certainly see bold headlines and discussions about the psychological impact of crossing through this threshold. But as psychological thresholds go, the S&P 500 passing the 1,000-point mark – mission already accomplished – was more important.

Comments

[dracula99:]

What does that mean? Who says the S&P is more important?

Sep 17 06:28 AM

[Living4Divi...:]

The SP500 is more important than the Dow, simply because the SP500 is composed of a diversified selection of 500 stocks from a wide variety of industries, whereas the DJIA only tracks 30 stocks.

Having said that, the SP500 only represents 2/3rds of the total US Stock Market capitalization. The best index is the Wilshire 5000 - which, ironically, tracks much more than 500 stocks.

I am puzzled by the performance divergence beween the DJIA and the SP500. Usually these two indexes track each other quite closely.

Sep 17 07:46 AM

[Paulk:]

"The best index is the Wilshire 5000 - which, ironically, tracks much more than 500 stocks."

There is nothing ironic about the Wilshire 5000 tracking more than 500 stocks. The number of stocks followed is stated in the name of the index.

Sep 17 08:51 AM

[unfaire:]

There are many market indexes, each representing a different aspect of the market. Whether a market index is "better" or "more important" for you, it depends on your purpose and how you are making sense out of it. If you are looking for a fast rising index after the 2008 crash or a wider coverage of certain type of stocks, S&P is of course the one, not DJIA. However, as the saying goes, what goes up must come down, there may be a down side to S&P. As another saying goes, it is not the size but how you use it.

Sep 17 09:31 AM

[Albertarocks:]

They manipulators took AIG and C out of the Dow index for a reason... because they're going to go to zero.

The purpose of the Dow index was lost decades ago when the piggybankers started removing weaker components and replacing them with stronger components. How lame is that? It effectively made the Dow, from that day forward, useless as an indicator of the economy.

It's exactly the same as a doctor taking your temperature with a trick thermometer that only gives a reading of 104 (40 Canadian lol) so that he can sell you medication to get your temperature down.

How in hell does the Dow make any sense at all? It really doesn't. Same with the S&P but to a much lesser extent.

Sep 17 05:18 PM

[driftwood2:]

For precisely the reasons you state, the dow isn't a very a useful index. It's ridiculous that it gets higher billing that the s&p500 or the Wilshire 5000.

Sep 17 09:35 PM

[LKofEnglish:]

divergence between S&P and Dow should GREATLY concern investors. Dow is price weighted so even worthless companies like AIG and Citi can have an impact (are they even that Dog that is the Dow anymore? Talk about crime payin'.) S&P is much simpler: market weighted. This move has been simply put a big cap rally. Small cap rallies are more common and to the "investing public" more "real." Big cap rallies scare people because do these companies even know what's going on? Doubtful. We have this big cap rally because it's what the government wants and likes. It appears more "managable" since these mega-corps have "plans" to "help the administration." leaving aside the fact that once they leave washington they're only recognizing the obvious and having washington pay them instead of vice-versa there is a rather obvious problem that this is nothing more than the blind leading the blind. in other words the clown leading "mega-corp" knows nothing more than the clown "leading the country." clearly this will end in a disaster--but don't equate a policy disaster with a market disaster. you and me "the sheeple" appear to be the market support via our taxes. it's "inflation, inflation, inflation" and who can really profit AS A BUSINESS in such a very opportune moment. it started out as energy stocks. now its "resource" stocks. rail-road stocks are on the move. this is a very narrow sector although tech has really had a nice move since they have lots of cash and zero debt. it stocks like GE and other base industrial companies really start to surge higher look out: our government has truly destroyed itself. it just confirms the "armageddon trade" is heading towards its inevetible conclusion.

Sep 17 11:41 PM

[dracula99:]

For all you experts out there, why does the DOW and S&P look identical in their graph? Obviously there is no divergence. The proof is in the graph. Any of you experts have the balls to make a guess of these indexes over the next year? didnt think so. There are no experts. Like I said before everyone is just guessing.

Sep 18 07:52 AM