Not an average day for Dow as it tops 20,000 for first time

Despite stellar day, has the 121-year-old blue-chip index outlived its usefulness?

The biggest problem with the Dow is that it weights stocks according to share prices, rather than the market value of individual companies.

The biggest problem with the Dow is that it weights stocks according to share prices, rather than the market value of individual companies.

 

Call it what you will. The old man of Wall Street, Dow Jones Industrial Average has been described, variously, as a hopelessly archaic, irrelevant index where the average company that joins the list can look forward to a share slump within a year.

But few things have excited Wall Street types as much in the past six weeks as speculation on whether the 121-year-old index will make it over the 20,000-point hill – largely on the back of hopes that Donald Trump’s election as US president will lead to a massive stimulus programme and, in his own words, be the “greatest job producer God ever created.”

The Dow finally did it on Wednesday. Can everyone get back to work now?

Created in 1886 with just 12 companies, the Dow Jones Industrial Average is made up of 30 stocks. Most are names we all know and love (or loathe): Walt Disney, Caterpillar, Home Depot and McDonalds, to name but a few. All of whom, bizarrely, are included by a decision of editors of the Wall Street Journal.

Components are picked along a set of broad guidelines that they be large, respected companies that represent a significant portion of the economic activity in the US. However, the S&P 500, for one, gives a much broader – and better – read of market sentiment. While the Russell 1,000 has, well, a thousand components.

The “curse” of being included in the Dow, according to data whizzes, is that new entrants to the index usually see their stock fall by more than 5 per cent within a year.

The biggest problem with the Dow is that it weights stocks according to share prices, rather than the market value of individual companies. Goldman Sachs, with a share price of $235, makes up more than 8 per cent of the index, while Apple’s price, at about $121, ranks number seven – even though the iPhone maker’s €640 billion market cap is 6½ times that of the investment bank.

It’s a wonder it has remained the world’s best-known stock index.