and Wall Street is my temple.
A few commentators have recently torpedoed
the joy of the money set who have used the
rising Dow Industrial Average score, which is
meaningless, as a sign that "the US is back!".
If you can have a listed company with all its
factories in China, then there's your P/E ratio
without having to employ one single
fat American.
checkit: New
statement
Dow
Jones nearing an all-time high. So what?
The
Dow is a silly index for silly people. Pay no heed.
By
Alex Hern Published 05 March 2013 12:18
Today
could be the day the Dow Jones Industrial Average hits its highest ever mark.
And it won't mean a thing.
The
DJIA—commonly referred to as just the "Dow"—is one of the most
important stock market indexes in America. With the S&P 500 and Nasdaq,
it's a useful proxy for the health of American business. When the Dow's up,
times are good; when it's down, hold on to your hats.
Later
today, it's expected that the Dow will
break 14,164.53, the all-time high reached on Oct 9, 2007. It closed at
14,127.82 yesterday, and a slew of "good" reports from Europe—where
French, German and UK PMIs came in higher than expected, albeit still
signalling contraction for the former—as well as futures contracts due to vest
today indicate that now’s the time it will break that barrier.
But
even if it does, it's a meaningless milestone. Due to the way the Dow is put
together, the two marks aren't comparable. So while you will read stories about
how "the American market has recovered", they may or may not be
true—and this says nothing either way.
Adam
Nash describes the problem:
Just thirty
stocks, hand picked by committee by Dow Jones, with no rigorous requirements.
Worse, it’s a “price-weighted” index,
which is mathematically nonsensical. When calculating the Dow Jones
Industrial Average, they take the actual stock prices of each stock, add them
together, and divide them by a “Dow Divisor“. They don’t take into account how
many shares outstanding; they don’t assess the market capitalization of each
company. When a stock splits, they actually change the divisor for the whole
index. It’s completely unclear what this index is designed to measure, other
than financial illiteracy.
In fact, there is only one justification for the Dow Jones Industrial
Average being calculated this way. Dow Jones explains it in this post on why
Apple & Google are not included in the index. To save you some time, I’ll
summarize: they have always done it this way, and if they change it, then they
won’t be able to compare today’s nonsensical index to the nonsensical index
from the last 100+ years.
The
end result is that, as Nash points out, the Dow is only "off its
highs" of 2007 because of it made one arbitrary decision rather than
another. If Apple had been introduced to the index in 2009 rather than Cisco,
the Dow would have broken its high well over a year ago. It would have been
nonsensical to report that then; and it's still nonsensical to care now.
