The Dow Jones Industrial Average saw its longest losing streak since 1978, falling for 10 straight days from December 5 to December 19, 2024. Meanwhile, the S&P 500, also tracked by… SPDR S&P 500 ETF NYSEARCA: SPYwas in a relatively flat trading range with six losing days before falling 3% on December 19. The Nasdaq 100 index, as it tracks it Invesco QQQ Nasdaq: QQQ, It actually rose to a new all-time high before falling 4% over the same period with seven red days. Evening news programs still refer to the Dow Jones Industrial Average (DJIA) as “the market” rather than the S&P 500 or Nasdaq 100.
Is it time to move beyond the Dow Jones as a market reference?
If you only followed the S&P 500, you wouldn’t think the market had such a historic losing streak. However, the Dow Jones Industrial Average sank every day during that period, painting a bleak climate. The DJIA, SPY and QQQ used to move in lockstep historically, but divergence has been increasing. This calls into question which benchmark index truly represents “the market.” When people say, “The market is down today,” should they really be using the DJIA, which consists of just 30 companies, as a reference or a broader sample of stocks like the S&P 500?
Is the Dow Jones Industrial Average too narrow to measure the markets?
The DJIA is a price-weighted index consisting of only 30 stocks. These 30 companies represent the largest and most established companies to provide a measure of the U.S. economy. A price-weighted index is one in which the price of each component makes up a small portion of the index, as stocks with higher prices will have a greater impact. The problem with a price-weighted index is that if one of its components undergoes a stock split, it will severely impact the value of the index. Critics believe that the Dow Jones Industrial Average is no longer an accurate measure of the performance of the financial market or the American economy.
Founded in 1896, the original DJIA consisted of 12 stocks, gradually expanding to 20 stocks in 1916 and finally to 30 stocks in 1928. It has remained 30 stocks ever since. None of the original 12 stocks remain in the index today. Instead of expanding the index, the committee regularly replaces underperforming stocks with new stocks. the Proctor & Gamble Company New York Stock Exchange: p It is the oldest component of the DJIA, having joined in 1932. The argument is that a larger sample size would paint a more accurate picture of market performance.
Is the S&P 500 the true benchmark for US markets?
The S&P 500 was created by Standard and Poor’s in 1957 to track the 500 largest public companies in the United States. The goal was to get a better representation of the U.S. economy and U.S. stock markets through a more comprehensive list of companies classified by 11 sectors and 24 industries. The S&P 500 is widely believed to be the most accurate representation and underlying benchmark index, which is why S&P 500 futures are the most widely traded index futures contract in the world.
It is also the benchmark against which investors and fund managers compare the performance (for example, funds often compare their performance to the S&P 500). The S&P 500 is a market cap-weighted index, which rates its components by market capitalization (not price like the DJIA). The problem with the market cap index is that the largest companies have the greatest influence on the value of the index. Magnificent Seven shares control nearly 30% of the total S&P 500 index.
While the larger number of stocks in the DJIA is likely to be a more accurate indicator of US markets, the S&P 500 should be turned to when it comes to a more accurate measure of the US economy and US stock markets.
To have an equal opportunity, investors can use the equal-weighted S&P 500 index that it represents Invesco S&P 500 Equal Weight Fund NYSEARCA:RSP. The difference in performance is stark. SPY is up 24.4% relative to RSP, up 12% year-to-date as of December 20, 2024.
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