Despite its flaws, Dow remains dominant

Martin Wolk Chief economics correspondent • Profile • E-mail

After meandering for much of the year, U.S. stock markets have been on a roll since midsummer, pushing to their highest levels in years, at least partly on optimism that the Federal Reserve is done raising rates and the economy is continuing to expand.

Investor enthusiasm also has been boosted by a series of record highs for the Dow Jones industrial average, which closed above 12,000 Thursday for the first time ever.

The buzz created by the Dow’s big day raises the question: Why does this idiosyncratic and flawed index — composed of just 30 stocks hand-picked by editors at The Wall Street Journal — continue to hold such a grip on the popular imagination?

It is hardly the most representative index available to assess the U.S. economy or stock market, nor is it used much by professionals or individuals to guide investment decisions.

Yet the Dow’s storied history, great brand name and unmatched 110-year track record still make it the best-known U.S. market indicator.

“It’s just embedded,” said Liz Ann Sonders, chief investment strategist for Charles Schwab and Co. “The media and broad public, Main Street, still see the Dow as the market.”

Because of the Dow’s relatively narrow focus, it long ago fell out of favor among professionals, who generally use the broader Standard & Poor’s 500 as their main benchmark.

The Dow industrials account for only 25 to 30 percent of the nation’s total market capitalization, compared with 80 percent for the Standard & Poor’s 500 and 98 percent for the Russell 3000, another well-known broad index.

And while the stocks in the S&P 500 also are hand-selected — by a committee of analysts —the approach is much more scientific. The membership of the S&P 500 literally is reviewed daily as analysts seek to make sure the weighting of the index closely reflects the industry makeup of all stocks traded on major U.S. exchanges, said Howard Silverblatt, a market equity analyst at S&P.

For example if banks make up 20 percent of U.S. market capitalization, the sector will have the same weighting within the S&P 500. And if regional banks are 5 percent of the total, that will be reflected as well.

“The aim of the S&P 500 is to emulate the entire market, not necessarily do better than the market,” Silverblatt said. “If we beat the overall market, we’re not doing our job.”

MORE FROM EYE ON THE ECONOMY

Eye on the Economy Section Front

'Problem' banks at highest level in 16 years RV industry no longer running on empty Long-term unemployed face dwindling options  Obama warns of 'double-dip recession' One in four metro areas in recovery mode Geithner warns lack of loans may slow recovery Of bats and billions: Following stimulus funds As stimulus funds trickle down, debate heats up Commercial real estate bust looms NYT: Ex-homeowners forced into shelters Eye on the Economy Section Front   Add Eye on the Economy headlines to your news reader: