In The Blogs

The Dow

| Tue Feb. 24, 2009 9:40 AM PST

Matt Yglesias is annoyed at the undue attention paid to the Dow Jones Industrial Average:

Not only is it obviously stupid for political commentators to be assessing the quality of economic policy by tracking the ups-and-downs of the stock market but the fact that the commentators who want to do this keep wanting to specifically use the Dow Jones Industrial Average just highlights their ignorance....Why not use the S&P 500? Or the Wilshire 5000?
To be clear, that wouldn’t make this idea any less dumb on the merits. But if we’re going to have stock-based punditry then it could at least be informed stock-based punditry. Back in the real world, the key issues are the trajectory of employment and income.

Clearly, the answer is that nobody makes or loses money based on betting on the unemployment rate. And we don't have exciting video of traders going nuts on exchange floors when hourly wage numbers are announced. And anyway, all that stuff is only available on a monthly basis. You can hardly run a 24/7 cable show based on that, can you?

In CNBC's defense, it's worth noting that they're just giving the people what they want. Lots and lots of fairly ordinary people have money invested in the stock market, but virtually nobody has a bunch of money invested in derivatives based on, say, the TED spread, even though right now it might be more important than the DJIA. What's more, it's sort of interesting just how good a proxy for the economy the Dow Jones is. Take a look at a historical chart and you'll see that its ups and downs correlate pretty well to the overall state of the economy. If you're looking for a sexy, fast-moving, gut-wrenching indicator of the economy's animal spirits, you can do a lot worse than the DJIA.

And why the DJIA instead of the S&P 500? It's the power of the first mover. The S&P didn't get started until 1923, and even then was published only once a week. Boring! By the time they finally got around to doing things daily, the DJIA was the king of quotes, and it's stayed that way ever since. And since the two indexes follow each other so closely anyway, I guess there's never been any really compelling reason to switch loyalties. Plus it helps when the guys who own the average also happen to own the country's biggest financial newspaper. That kind of synergy is hard to beat.

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Kevin Drum is a political blogger for Mother Jones. For more of his stories, click here.

Comments

I've got a Dow Jones!

Submitted by thersites on Tue Feb. 24, 2009 9:48 AM PST.

Is the S&P my methadone? Or should I switch to NASDAQ and slowly cut back?

What's a GSPC?

Submitted by Simplicio on Tue Feb. 24, 2009 9:59 AM PST.

What's a GSPC?

Submitted by karog (not verified) on Tue Feb. 24, 2009 10:20 AM PST.

^GSPC is the index symbol for the S&P 500 at Yahoo (like MSFT is Microsoft's stock symbol).

DJIA and Yglesias

Submitted by DBL (not verified) on Tue Feb. 24, 2009 10:19 AM PST.

Funny, I don't remember Matt complaining about the attention paid by the media to the DJIA during the election last fall. Gee, what could be prompting him to complain about it now? I wonder what it could be. Huh, I just can't figure it out.

A Little Outdated

Submitted by Jameson (not verified) on Tue Feb. 24, 2009 10:30 AM PST.

Commentators may occasionally mention the Dow, but no serious person in the industry uses it for a market proxy any more. The S&P is the gold standard, particularly for anyone interested in finance. Matt's complaint is accurate, but a little outdated.

A Little Outdated

Submitted by Jameson (not verified) on Tue Feb. 24, 2009 10:30 AM PST.

A Little Outdated

Submitted by Jameson (not verified) on Tue Feb. 24, 2009 10:30 AM PST.

A Little Outdated

Submitted by Jameson (not verified) on Tue Feb. 24, 2009 10:30 AM PST.

the DOW and other indexes fool average investors

Submitted by tpx on Tue Feb. 24, 2009 11:08 AM PST.

Prior to the advancements of computing and communications it might have made sense to describe equities markets with an index, but in the Twenty-first Century indexes obscure what is happening to individual firms' stock prices because of the way the media reports the index as the market. Now the DOW and other indexes fool average investors. Most equities speculators do not purchase all the stocks in an index, they purchase stocks of individual companies that may or may not be in one of the indexes. The DOW is used by media to report on the stock market's performance for any given period of time. When people say the stock market went up or down, they usually mean the DOW or another index went up or down, which conveys no information about any particular company's equity price movement. A speculator's investment in any particular company's stock may not move in tandem with the index, despite what DOW theorists say. The economy, however, should not be measured by the performance of equity speculation markets. The value of share prices may at one time have reflected the performance of a company and the market it sold products or services in, but even that is doubtful. Equity prices' value are based on whether or not there is supply and demand for them, not whether or not there is supply and demand for the products or services any particular company sells for revenues.

This is a country where the

Submitted by MaynardHandley on Tue Feb. 24, 2009 11:57 AM PST.

This is a country where the best-selling financial software (Quicken) - tells you the total return on your investments but not the ANNUALIZED return - is incapable of drawing a log-linear plot of your return, as opposed to a pure linear plot Why would you expect TV to be any better? The average American is a financial moron, and appears to have zero interest in changing that. "Sure I could spend two hours reading about investment and thereby save myself thousands of dollars, but it's so much easier to watch CNBC, be entertained, and pretend to myself and my family that I'm being responsible". It's hard to allocate blame here. Yes, CNBC and it's ilk should be doing something to educate the public; on the other hand the public has plenty of ways to educate itself and has no interest in doing so.

DOW watching

Submitted by Anonymous (not verified) on Tue Feb. 24, 2009 1:13 PM PST.

The key part in Matt's post is in the first sentence: "Not only is it obviously stupid for political commentators to be assessing the quality of economic policy by tracking the ups-and-downs of the stock market...". The stock market has long been divorced from the rest of reality. Look how often the market improves when a company announces it is laying off thousands of employees. The market is focused the short term, what will cause an increase or decrease in stock prices. Since no recovery program is going to focus on driving up stock prices, the market will be unhappy no matter who proposes what. The media announcing that "The stock market didn't like the latest proposal" is as newsworthy as saying "The sun came up today"

Potato/potahto

Submitted by santamonicamr (not verified) on Tue Feb. 24, 2009 3:19 PM PST.

My, what a big who cares. The two trends are exactly the same. Follow either one you want; the answer will be the same. The weird thing is that the two trends are exactly the same. They're composed of very different mixes of companies. You'd think there would be *some* variation. But apparently not. Apparently, *all* companies tend to follow the general economy. And that, my friends, is why we pay the CEOs such very big bucks. It takes a certain genius to follow aggregate trends.

Stock Market

Submitted by David Dzidzikashvili (not verified) on Fri Mar. 6, 2009 4:19 PM PST.

Dow Jones Industrial Average index is at its lowest levels because the investor condence level is at its bottom low. High unemployment and bad economic news also keep the stock market under pressure. I think unfreezing of the credit matkets should have a positive effect on investors, but I don't believe we will have that untill at least 2010. I think we might even see Dow in mid 5Ks or even lower if we don't have more good economic news soon.

Looking for someone to be

Submitted by Zachary U. (not verified) on Wed May. 13, 2009 1:08 AM PDT.

Looking for someone to be blamed will just turn the situation worst. The best thing to do is to look for some modes to solve the existing problem. With all news shows and newspapers repeatedly forecasting gloom and general doom on the horizon, it might be time for a get away. A good get away can do you loads of good. Recharge the batteries, unwind, get out of the office and relax for a bit. A personal loan for a vacation, although you do have to pay it back, could be a worthy investment. Or maybe you made a little money on a stock exchange. (Not many can claim that these days.) We are in a recession, so you obviously have to bear a little common sense in mind. That said, if you aren't in debt consolidation, it might be time for a get away.

I would say, try as many

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