The Dow Isn’t Best Way to Gauge the Market

Although the stock market has had a strong run in recent years, New York Times columnist Jeff Sommer argues that the level of performance “depends on what you mean by ‘the stock market.’ ”

He cites the divergence between the rise in the Dow Jones industrial average, the “oldest and best-known measuring stick for the American stock market” (which has gained more than 18% over the last year), and the S&P 500, the “benchmark for large companies used by many stock professionals” (which has seen a 12% rise over the same period).

The gap, writes Sommer, has deepened further since last November due in large part to the way the two indexes are constructed, citing the performance of two companies–Apple and Boeing—as supporting evidence. Boeing, he reports, has had little impact on the S&P 500, but has “provided a giant lift to the Dow,” almost two times that of Apple—the “most valuable company in the entire stock market.”

An important consideration, Sommer says, is that the S&P 500 is a market cap-weighted index, so larger companies have a bigger impact. While Boeing is hardly small, Apple’s size is a big contributor to the divergent impacts of the two companies. According to Wharton finance professor Jeremy Siegel, the article says, “The S&P tells you much more about how the market is really doing,” but points out that the Dow—comprised of only 30 stocks that are weighted by price–is what people cite when talking about daily market movements. “It’s a crazy way to measure the market,” says Siegel.