Isn’t it time to dump the Dow? The Dow is the closest watched (by much of the public) 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. (see Wikipedia). The components of the Dow changes over time with GE added in 1911 as its longest lasting member. However, 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? Better yet, since we have the technology, why not include all stocks traded on 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 Now that would be an accurate representation of what is happening in the market rather than citing an outdated anachronism of the past?
Harold A. Black is professor emeritus in the Department of Finance, University of Tennessee, Knoxville having retired after 24 years of service. He has served on the faculties of American University, Howard University, the University of North Carolina - Chapel Hill and the University of Florida. His government service includes the Office of the Comptroller of the Currency and as a Board Member of the National Credit Union Administration. He also has served on the boards of directors Home Savings of America and its parent company, H. F. Ahmanson & Co., Irwindale, California prior to its merger with Washington Mutual Savings Bank, on the board of New Century Financial Corporation, Irvine, California, then the nation’s largest real estate investment trust and as director and later chairman of the Nashville Branch of the Federal Reserve Bank of Atlanta. He writes an occasional article for the Knoxville News-Sentinel at http://www.knoxnews.com/staff/dr-harold-black/. His web page is haroldablackphd.com