Dow Jones: A Relevant Benchmark or a Relic of the Past?

The Dow Jones Industrial Average (DJIA) experienced its longest losing streak since 1978, declining for 10 consecutive days from December 5 to December 19, 2024. During this period, the S&P 500 index, followed by the SPDR S&P 500 ETF Trust NYSEARCA: SPY, remained relatively stable, facing only six losing days before a 3% drop on December 19. Conversely, the Nasdaq 100 index, represented by the Invesco QQQ NASDAQ: QQQ, reached a new all-time high before experiencing a 4% decline amidst seven losing days. Despite these shifts, many news outlets still refer to the Dow as "the market" instead of highlighting the S&P 500 or Nasdaq 100.

Is It Time to Move Beyond the Dow as a Market Reference?

For those focused solely on the S&P 500, the market's scenario may not seem as dire. However, the DJIA was consistently falling during this timeframe, suggesting a more pessimistic market atmosphere. Historically, the DJIA, SPY, and QQQ have moved together in harmony, but this trend appears to be changing, raising questions about which index truly reflects "the market." Should individuals continue to refer to the DJIA, which only consists of 30 companies, or should they consider a broader index like the S&P 500?

Is the DJIA Too Narrow of a Measure of the Markets?

The DJIA is a price-weighted index composed of just 30 stocks, showcasing some of the largest and most well-known companies. In a price-weighted index, each stock's price influences the index's overall value: higher-priced stocks have a more substantial effect. This structure can lead to distortions, especially if a company undergoes a stock split. Critics contend that the DJIA no longer accurately reflects market conditions or U.S. economic performance.

Created in 1896 with an initial 12 stocks, the DJIA expanded to 20 in 1916 and finally to 30 in 1928. This number has held steady since then, with none of the original companies remaining. Instead of broadening the index, a committee consistently replaces underperforming stocks with new selections. The Procter and Gamble Co. NYSE: PG holds the distinction of being the longest-serving member, joining in 1932. Some argue that a broader stock base would yield more accurate market performance indicators.

Is the S&P 500 Index the True Benchmark for the U.S. Markets?

The S&P 500, established by Standard and Poor’s in 1957, encompasses the 500 largest publicly traded companies in the United States. The goal was to create a more comprehensive reflection of the U.S. economy and stock markets across 11 sectors and 24 industries. Today, the S&P 500 is viewed as the primary benchmark index and is the most actively traded futures contract globally.

It also serves as the standard against which investors and fund managers measure performance. Unlike the DJIA, the S&P 500 is a market capitalization-weighted index, meaning that companies with larger market values exert more influence over the index's movements. Recently, the so-called "Magnificent Seven" companies have garnered close to 30% of the total index value.

While incorporating more stocks into the DJIA might improve its market representation, analysts largely view the S&P 500 as the most accurate gauge of U.S. economic and stock market performance.

For a more balanced approach, investors may explore the S&P 500 Equal-Weight index, represented by the Invesco S&P 500 Equal-Weight ETF NYSEARCA: RSP. In comparing performance, significant disparities emerge. As of December 20, 2024, the SPY posted a 24.4% increase, while the RSP only managed 12% year-to-date.

Dow, Index, Market