Studying the Dow / S&P 500 Ratio

Imagine if the Dow was 3,000 points higher than it is today. That’s where it would be if it had merely kept pace with the S&P 500 over the last few decades.

The Dow used to be about 10 or 11 times the S&P 500 (I’m referring to the index number, not market cap), but the ratio slowly sank for a long time.

The Dow/S&P 500 hit its low point in 1985 when the Dow was less than seven times the S&P. Since then, the Dow has had a bit of a comeback. In 2002, the ratio broke 9.5 for the first time in over 25 years.

After falling back some from 2002 to 2004, the Dow has outpaced the S&P 500 over the last two years.

Comments

[tuj]

Dude, what is your point? They are 95.5% correlated since 1980, and if you look at a year chart or at a daily, the correlation is very strong. If you look since 2001, there really hasn't been a huge difference, if anything the DOW has all the upside.

finance.google.com/fin...;

[adan]

interesting, yes; but seems it raises all kinds of questions of what it may or may not mean - maybe a follow up ? :-)

[eddy]

Tuj, the point is that the Dow would be 3,000 points higher if it had kept pace with the S&P 500. Dude! Also, you can see that the normal relationship broke down during the tech bubble and its deflating. These relationships don't always hold up so well.

[Rob_Dublin]

This argument is fundamentally flawed as the indexes are not comparable. The Dow is a price weighted index, whereas the S&P is a market-value weighted index. The S&P consequently gives a much better representation of the market than the Dow, which suffers from an arcane calculation methodology. Furthermore, in the present risk averse market climate, you would expect the large-cap-skewed Dow to outperform the S&P.

[eddy]

Wrong Rob. Just because the indexes are calculated differently doesn't negate the importance of comparisons. Different sets of data are always compared, from debt ratios to price/earnings ratio. The important lesson is what kinds of inferences can you draw from these comparisons.