As the Dow Jones is hitting 10K everyone seems to be excited about the “important” milestone. Newspapers, twitter and TV are all over Dow Jones reaching 10K and the recession is over, but is it really a big deal? I am not sure if everyone still pays a lot of attention to the Dow, I personally find Dow Jones a rather useless index.
Dow Jones Useless
Why do I think that the Dow is not a useful index? Several reasons, biggest reason being that the Dow consists of only 30 companies, I highly doubt that these thirty companies are an accurate representation of the stock market or the economy. Second the current Dow cannot be compared to the Dow Jones in other times, the Dow Jones is not a consistent index, it includes and excludes companies as it sees fit. For example it recently replaced American Insurance Group (AIG) with Kraft Foods (KFT), although this maybe somewhat justified since AIG stock tumbled, past switches are not very justified. Other recent additions to the Dow Jones, since the Dow passed 10,000 for the first time, are Microsoft (MFST) and Home Depot (HD).
Why is Dow Reaching 10K a Big Deal?
Some believe that the Dow reaching and breaking through the 10K milestone (again) marks the end of the recession or at least confirms we are in a recovery. The premise for this assumption that the stock market is often a leading indicator for the economy, as the Dow surpasses a big milestone the economy should be in the recovery phase. Although the premise maybe true, I think that the Dow Jones is not a very accurate and useful index to base this conclusion on. The 10,000 is more of a psychological barrier than anything else.
What do Experts Think of Dow 10K?
As usual the “experts” do not agree with each other, some think it is an important milestone while others believe it is just a psychological barrier. However, some inferences can be drawn about the importance of the Dow Jones from new companies being added to the index. If the Dow Jones is seen important by investors then in theory if a new company is included in the Dow Jones it’s price should jump up because of more visibility and because some fund managers need to hold Dow components. In reality this does not happen BusinessWeek points out that there is little impact on stocks moving in our out of the Dow, so it is becoming irrelevant to investors.
I think looking at other economical data such as unemployment numbers and looking closer at earning reports are better indicators of the economy. The Dow had its days and is no longer a major indicator of the economy. Successful investing is to ignore noise and continue to follow through with your investing plan.
What Do Others Think?
I thought I check with some of my twitter followers as to what they think about Dow at 10K and here are the results:
@JoeTaxpayerBlog D10K means nothing to me. we are mostly in S&P. 1500 woot! And either index ignores dividends. So I guess one can calculate the real breakeven, and I’m sure we’re well above it by now. [JoeTaxpayer]
Looks like nobody believes the magic 10K is meaningful.
What are your thoughts on the Dow Jones passing 10K? Is it important? Does it mean anything significant? Is Dow Jones still relevant?