I hate to be a humbug – OK, maybe I don’t hate it too much – but watching the Dow Jones industrial average cross 18,000 is the viewing of a psychologically unimportant milestone. Dow 13,000 — which the index crossed most recently in February 2012 — was mentally meaningful because that level had been breached before the financial crisis and surpassing it meant the index was finally getting close to reaching new peaks.
Dow 20,000 is the next psychologically interesting number, because most investors now are trying to decide if they believe the index will breach that barrier without crossing back below 15,000 first.
But Dow 18,000?
For those trying to put an optimistic spin on it, you can look at it as a Glassman-half full, as in James Glassman’s famous 1999 book “Dow 36,000,” which suggested the index would reach the title level in relatively short order.
If you’re a pessimist, Dow 18,000 is a Glassman half-empty, because it highlights just how hard it has been to get halfway to the author’s target.
While there’s no arguing that the numbers have made the famous Glassman forecast — co-authored by economist Kevin Hassett — look like folly, the real message of the book was that long-term investors should load up on U.S. stocks. Over the 15-year period since the book was published, the Dow is up about 5.5 percent annualized, performance hurt dramatically by two bear markets but significantly bolstered by gains of roughly three times that size over the past three years.
Arguing over the meaning of the Dow passing a landmark, however, misses the bigger point.
The Dow is the celebrity number of the financial world, not the meaningful one.
As I noted in October, the hype right now — and yes, I know I am contributing to it, but like the rest of the media I have a job to do during the holiday slowdown season — simply shows why it’s time for the media to stop discussing the Dow as if the index actually matters.
The Dow is important to people because it’s what they know, the staple of every market-oriented website, every radio station market update, every newspaper’s daily business section, and the centerpiece of the 20 seconds of coverage that every national newscast guarantees the investing world each day.
But that’s precisely what makes it a celebrity index. A celebrity is someone who is famous, mostly, for being known. It’s the Kardashian sisters, whom you may have heard of and be curious about, but who don’t have any particular talent.
The Dow, as an index, is not particularly talented either. That’s why it hasn’t been particularly important or meaningful in the investing world for a long time, probably for the many years since Dow Jones, the company — which owns MarketWatch, my employer — stopped having any relationship to the index itself.
For more than a decade, investors talking about “the market” have been referring to the Standard & Poor’s 500 or the Wilshire 5000 Total Market Index.
The Dow is too thin and poorly constructed for anyone in the know.
As an “industrial average,” you’d expect it to be a sector index for industrial companies (as an investor, that would make it more like the Industrial Select Sector SPDR (XLI), which is up about 6.75 percent annualized for the past 15 years).
Instead, the Dow is a price-weighted average of 30 actively traded blue-chip stocks.
The 30 companies aren’t all “industrial,” and there aren’t enough securities in the index to make it a broad reflection of anything, even the sector it is named for.
“Price-weighting” an index is old-fashioned and anachronistic. It means that each stock influences the index in proportion to its price per share, so that a stock trading for $1,200 per share has 10 times the pull of a stock trading at $10 per share.
By comparison, a “cap-weighted index” like the S&P uses the market value of the listed stocks as the basis for how much weight they carry in the benchmark. There are also equal-weight indexes — each stock pulls the same weight — and any number of other constructions, virtually all of them now considered superior by experts to the price- weighted methods of the Dow.
And as for “blue-chip stocks,” that term is outdated; it no longer has any unique meaning on Wall Street, where the few mutual funds that still have it in their name benchmark to the S&P, not the Dow.
All of which brings us back to the need to de-emphasize the Dow.
Even the 100-plus point moves that were a big deal back in the late 1980s — when Black Monday really imprinted the Dow’s movements on the psyche of the public — are a waste of emotion today.