Posted tagged ‘Words Matter’

A Pet Peeve: S & P, not Dow Jones

September 30, 2008

Just listening to NPR, and they talked once more about the record drop in the Dow.  The Dow is a skewed, small and much more imprecise than needed index of market performance. Worst of all, for anyone that cares about sample size and error, its cherry picked 30 companies provide a very narrow snapshot of the market as a whole

The S & P 500 is imperfect as well.  It’s criteria exclude Berkshire Hathaway, for example, which is odd at best.  It is a constructed index.  That is, unlike very broad measures like the Wilshire 5,000, which is a very close proxy for the American stock market as whole, the five hundred large companies within the S & P are selected (and de-selected, which creates difficulties in interpreting historical price comparisons) based on issues of market sector and so on.

But it is still a pretty good proxy for the market. According to the S & P’s own claim, the index covers about 75% of the total capitalization of the American stocks.  It is a much, much better measuring stick than the Dow.  The Industrials index retains its cachet as a brand; it is not that good a tool.  Let’s move on please.

Image: “The excitement before the bubble burst” – people looking at ticker tape in front of a stock ticker, probably sometime in 1929.  http://www.ssa.gov/history/wallst.html.  Source:  Wikimedia Commons.