Unconventional Wisdom: The Dow Jones Industrial Average

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by Ari Rutenberg

There is a lot of conventional wisdom surrounding the mainstream discussion of the economy. Most of it, like almost all cw (conventional wisdom), is derived by taking something specific, say the Dow Jones Industrial Average, and equating it with the general health of the economy.

The reality is that the DJIA has three main problems when used as an indicator of welfare. First it is simply a poor indicator of the general welfare, as it only matters directly to those who are wealthy and need near-term access to their securitized (read non-cash) funds.

The second problem is that the DJIA is a lagging indicator, which means it follows the rest of the economy. This means that things like unemployment rates (which have cw issues of their own that will be discussed later) actually affect the movement in the Dow when they are released each month. No one gets a job because the Dow goes up 300 points in a day, but when a lot of people are laid-off it is likely to make the Dow drop. Therefore it only reflects what is happening in the rest of the economy, and thus tells us almost nothing useful.

Third it is a very narrow metric. Having only 30 stocks, all of which are shares in large corporations, means that the DJIA is far too sensitive to individual companies highs and lows to tell us much of anything, as broad based gains in multiple sectors can be wiped out by one sharply falling stock or vice versa. If we, as a society, have made a determination that looking at stock averages is an important component of consumer confidence then there are other averages we might look at. For instance, the NASDAQ average has 3200 stocks, the Russel 3000 has nearly 98% of U.S. equity market represented, and even the NYSE's own Composite Index uses over 2,000 stocks. So if we do need to look at stock markets, then there are much better numbers to watch.

Everyone needs to stop looking at the Dow. It screws with people's heads. Watching the constant, and quite normal, fluctuations in the Dow probably causes as many problems as the actual loss in value. The conventional wisdom here is simply misplaced. There is no reason to hang on very little blip in the Dow, and it gets in the way of a real discussion about the fundamental problems in our economy.