Forget the Dow: America's Financial Weather Vane Has as Much Bull as the Market (Dow Jones Industrial Average)

By Sloan, Allan | Newsweek, October 28, 1996 | Go to article overview
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Forget the Dow: America's Financial Weather Vane Has as Much Bull as the Market (Dow Jones Industrial Average)


Sloan, Allan, Newsweek


America's financial weather vane has as much bull as the market

ONCE AGAIN, IT'S TIME TO TALK about the stock market. The reason, of course, is that last week Wall Street's most sacred icon, the Dow Jones industrial average, broke through yet another barrier, closing above 6000. This came less than 11 months after the market broke 5000, and less than 20 months after it broke 4000.

Be still, my heart. For despite the hoopla surrounding this pseudo-event, there are lessons here: some new, some old. The new one is that you shouldn't pay very much attention to the Dow, which is a runny measure of the stock market even though everyone uses it, including me. The old lesson is that you shouldn't let any number ending in three zeros determine what you do, no matter what assorted pundits and experts tell you. After all, it's your money, your life, your investment decisions.

That said, a 6000 Dow raises the same questions people were asking when the Dow hit 4000 and 5000. If you're not in the market, is it too late to join the fun? If you're in, should you get out just in case the market has peaked? Will the next thousand-point mark the Dow hits be 7000 or 5000? No one knows, least of all those of us at NEWSWEEK. We're the people who put a boar on the cover 2400 points ago.

But here's some advice, anyway, before we move on to something more interesting-why it's wrong to deify the Dow. Point one: yes, sooner or later the market

fall sharply, despite stocks' having defied history and logic by rising almost continually since OCTober of 1990. Point two: for heaven's sake, don't chase hot stocks or hot mutual funds unless you're prepared to lose your shirt. Trendsurfing is in, but sooner or later, you miss the wave and get wiped. Point three: please, please, please don't take the Dow industrial average too seriously.

If the Dow hadn't already been around for 100 years, no one would create it now. To be sure, very smart people tend the average and try to keep it up to date. Over the years they've modernized the Dow by leavening its portfolio of heavy industrials with such nonindustrials as Coca-Cola, Disney and McDonald's. Still, the average's built-in flaws make it subject to weird and random movements. And that brings us to the main and final point. The Dow can tell you which way the market is going, but it's a crude tool. Obsessing about small moves-- like whether 6000 says something that 5900 didn't-is like using a cleaver to perform open-heart surgery.

Look at how the Dow actually works and much of what happens seems, well, odd. Let me give you some examples, courtesy of Birinyi Associates. Birinyi calculated how much each Dow stock included in the Dow contributed to (or subtracted from) the average during its climb from Nov. 21, 1995, when it first closed above 5000, to OCT. 14, when it first closed above 6000.

For starters, two of the 30 Dow stocks, IBM and United Technologies, accounted for more than 20 percent of the rise. This odd couple had the greatest impact on the Dow even though thin: shares didn't register the greatest percentage gain and their stock-market values aren't even close to being tops. Had IBM and UT split their stocks 2 for 1 the day the Dow broke 5000, the Dow would still be flirting with 6000, rather than closing Friday at 6094.

Here's why. When the Dow made its first appearance in 1886, people added numbers by hand. So the Dow is an average, which can be calculated quickly and simply. That's why a dollar change in the price of any stock has the same effect as a dollar change in any of the other 29. A dollar move at Bethlehem Steel, which changes the company's stock-market valuation by $110 million, counts just as much as a dollar move in Coca-Cola, which adds or subtracts $2.5 billion. For reasons we won't get into, a dollar change moves the Dow about 2.

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