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

The Dow Jones Industrial Average (DJIA) experienced its longest consecutive losing streak since 1978, dropping for 10 consecutive days from December 5 to December 19, 2024. In contrast, the S&P 500 index, tracked by the SPDR S&P 500 ETF Trust NYSEARCA: SPY, showed relatively flat trading conditions, with only six losing days and a subsequent 3% decline on December 19. Meanwhile, the Nasdaq 100 index, represented by the Invesco QQQ NASDAQ: QQQ, actually reached a new all-time high before falling by 4% during the same period, marking seven down days. Despite these performances, many news programs continue to 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 one were to focus exclusively on the S&P 500 index, one might not recognize the significance of the DJIA’s losing streak. While the DJIA declined steadily, the other indices did not reflect such a severe downturn; this raises questions about which index is the best representation of the market. Historically, the DJIA, SPY, and QQQ moved in unison, but this trend is changing, leading to doubts about whether the DJIA, with just 30 companies, remains a solid benchmark for the broader market.

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

The DJIA, established in 1896, serves as a price-weighted index composed of only 30 high-profile stocks intended to represent the American economy. In a price-weighted index, the price of each stock determines its weight in the index, meaning that higher-priced stocks disproportionately affect the overall index value. This structure could lead to misleading conclusions if a high-priced stock undergoes a split, as it would significantly alter the index without a fundamental change in company performance. Critics argue that this narrow scope no longer captures the broader financial landscape or economic conditions of the U.S.

Historically, the DJIA began with 12 stocks, growing to 20 in 1916, and ultimately to 30 in 1928, where it has remained ever since. Interestingly, none of the original stocks from the initial listing are part of the index today. Adjustments are only made by replacing underperforming companies with more suitable options. For instance, the Procter and Gamble Co. NYSE: PG is currently the longest-serving member, having joined in 1932. A larger index would likely provide a more accurate reflection of market trends.

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

Created in 1957 by Standard and Poor’s, the S&P 500 index includes 500 of the largest public companies in the U.S., designed to offer a more comprehensive view of the economy and stock market. The S&P 500 divides companies into 11 sectors and 24 industries, making it widely recognized as the most accurate index for measuring market performance. It is also the benchmark for comparing the performance of both individual investors and fund managers.

Unlike the DJIA, the S&P 500 is a market capitalization-weighted index, which gives greater prominence to companies with larger market valuations. However, this can lead to dominance by a few large companies, often referred to as the Magnificent Seven, which make up nearly 30% of the index total. Although some argue for a larger number of stocks in the DJIA, it is clear that the S&P 500 remains the most reliable measure of U.S. market performance and economy.

For those wanting a fairer perspective, the S&P 500 Equal-Weight index, represented by the Invesco S&P 500 Equal-Weight ETF NYSEARCA: RSP, is available. Performance metrics show significant differences; for example, as of December 20, 2024, the SPY gained 24.4% year-to-date compared to the RSP’s 12% increase.

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

Before making any investment in the SPDR S&P 500 ETF Trust, research is key.

Market experts continuously analyze top-performing research analysts and the stocks they recommend. Interestingly, current analysis shows that the SPDR S&P 500 ETF Trust is not featured among the top five stocks consistently recommended to clients, suggesting that there may be better investment opportunities available.

Be careful with investment decisions by keeping informed of insider trading actions. Would you want to know if a company's key executives were selling their shares?

DowJones, Market, Benchmark