As the Dow nears 10,000, a reality check

By Ben Steverman

updated 1:56 p.m. ET Oct. 13, 2009

It's not a foregone conclusion, but, if all goes right for stock investors, the Dow Jones industrial average could surpass the 10,000 mark soon.

On Oct. 12, the 30-stock blue chip benchmark rose 21 points, to 9,885, putting the widely watched index within a strong day's rally of the big round number that seems to preoccupy many investors. (At one point in the session the Dow stood just 68 points away.)

The 10,000 milestone is likely to garner big headlines. It would remind average investors that equities have achieved big gains since the market lows of seven months ago.

Wall Street veterans, however, are likely to greet the Dow's achievement with a collective yawn. "To me, it means nothing," says Dave Rovelli, managing director of equity trading at Canaccord Adams.

Traders, strategists, and portfolio managers all but ignore the Dow in favor of other indexes. Unlike the Standard & Poor's 500-stock index, which serves as the basis for a bevy of mutual funds and exchange-traded funds, very few investments are based on the Dow.

One reason is that the Dow is small and unrepresentative: While the S&P 500 consists of 500 companies from all segments of the U.S. economy, making it an appealing proxy for the broader stock market, the Dow features just 30 stocks, all very large corporations.

The last year has demonstrated the oddities of the Dow. The blue chip index has significantly lagged other measures of the stock market.

The Dow did slightly better than other indexes during the market turbulence of 2008 and early 2009, but it has fallen far behind during the market's recovery. If the Dow had performed as well as the S&P 500 in 2009, it would already be approaching the 10,500 level.

A key feature of the stock market's recovery since March has been its favoring of smaller, riskier companies. Since the lows in March, the Dow is up about 50 percent, but the S&P 500 is up 58 percent. Meanwhile, the tech-heavy Nasdaq composite index has advanced 66 percent, and the small-cap Russell 2000 index has jumped more than 75 percent.

If the Dow had performed as well as the small stocks in the Nasdaq and Russell 2000 this year, it would be above 11,000 by now.

"What you've seen this year has not been atypical of what you get when the economy transitions from recession to recovery," says Keith Goddard, manager of the Capital Advisors Growth Fund. The highest quality stocks lag, he says. In terms of share-price performance, huge, well-respected companies like Wal-Mart and Procter & Gamble — both Dow components — fell behind small firms that several months ago looked to be "on the brink of bankruptcy."

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