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

The Dow Jones Industrial Average (DJIA) recently experienced its longest consecutive losing streak since 1978, dropping for ten consecutive days from December 5 to December 19, 2024. In contrast, the S&P 500 index, as represented by the SPDR S&P 500 ETF Trust NYSEARCA: SPY, was relatively stable with only six losing days before it fell by 3% on December 19. Meanwhile, the Nasdaq 100 index, tracked by the Invesco QQQ NASDAQ: QQQ, even reached a new all-time high before declining by 4% during the same period, recording seven down days. Notably, evening news programs still refer to the DJIA as "the market," overshadowing the S&P 500 and the Nasdaq 100.

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

If you follow the S&P 500 index, you might not perceive the market as experiencing a significant losing streak. However, the consistently declining DJIA during that timeframe suggests a troubling market climate. Historically, the DJIA, SPY, and QQQ tracked each other closely, yet recent trends highlight a growing divergence. This raises the question of which index truly reflects "the market." When people comment that "the market is down today," should they still rely on the DJIA, which only includes 30 companies, or adopt 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 that comprises just 30 stocks, representing some of the largest and most established companies in the U.S. A price-weighted index means that the stock price determines its influence on the index—higher-priced stocks carry more weight. A key criticism of this structure arises when a company undergoes a stock split, which can drastically alter the index's value. Consequently, many argue that the DJIA no longer accurately reflects the performance of the financial market or the U.S. economy.

Established in 1896, the DJIA began with 12 stocks, which increased to 20 in 1916 and eventually 30 in 1928, remaining at this number ever since. None of the original 12 stocks remain in the current index. Rather than expanding, a committee routinely replaces underperforming stocks with new ones. The Proctor and Gamble Co. NYSE: PG is the oldest stock still in the index, having been added in 1932. Critics contend that an index with a larger sample size would provide a more accurate depiction of market performance.

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

The S&P 500 index, created by Standard and Poor’s in 1957, tracks the 500 largest publicly traded companies in the U.S. Its goal was to deliver a better representation of both the U.S. economy and equity markets through a more comprehensive index, divided into 11 sectors and 24 industries. The S&P 500 is often viewed as the most accurate benchmark index, which is why its futures are heavily traded.

Furthermore, the S&P 500 serves as a performance benchmark against which investors and fund managers often compare their results. Unlike the DJIA's price-weighted method, the S&P 500 is market capitalization-weighted, meaning that larger companies exert more influence on the index's value. For instance, the so-called Magnificent Seven stocks account for nearly 30% of the total S&P 500 index.

While a more extensive DJIA could yield a better picture of market dynamics, it is the S&P 500 that remains the most reliable reflection of the U.S. economy and stock markets.

For those seeking an even playing field, consider the S&P 500 Equal-Weight index, represented by the Invesco S&P 500 Equal-Weight ETF NYSEARCA: RSP. The performance contrast is striking: the SPY has increased by 24.4%, while the RSP has only gained 12% year-to-date (YTD) as of December 20, 2024.

Should you invest $1,000 in SPDR S&P 500 ETF Trust right now?

Before making a decision about the SPDR S&P 500 ETF Trust, it’s wise to be informed.

Leading analysts on Wall Street track the performance of various stocks daily and recommend certain investments to their customers. Recently, it was noted that the SPDR S&P 500 ETF Trust is not currently among the stocks highlighted by top analysts for buying opportunities.

Ultimately, if a company’s CEO, COO, and CFO are selling off their shares, shouldn’t investors take notice?

Dow, Market, Benchmark