It’s Time to Retire the Dow
Where is Amazon, Facebook, or Alphabet? The most overrated metric in all of moneydom finally proves its irrelevance.
The Dow Jones Industrial Average is getting its latest makeover, a process of adding and subtracting companies that happens every few years. One thing about this ritual stays constant: It can never quite disguise that the Dow is the most overrated metric in all of moneydom. This most recent spruce-up, taking effect today, is a stark example of why that is so — and why there has never been a better time to ignore the Dow.
The state of the Dow is routinely cited by evening news anchors and in digital and print headlines as some kind of gospel-level measure of the American financial markets and by implication the economy in general. But in reality, the Dow is an index tracking the performance of a mere 30 stocks that supposedly give us all an idea of the broader business picture.
Which 30 stocks? The answer changes over time; that’s what these regular makeovers are about. (The Dow dates back to 1896, when it consisted of a dozen industrial companies; it later expanded to 20 companies, then 30, including nonindustrial firms.) Most recently, three members are being given the boot: oil giant ExxonMobil, drug maker Pfizer, and aerospace and defense firm Raytheon. The new inductees are software behemoth Salesforce, biopharma company Amgen, and the venerable conglomerate Honeywell (which, as it happens, is making a return, having been kicked out of the Dow a little over a decade ago).
The event that sparked this adjustment was not an overnight change in the makeup of the American economy. It was Apple announcing a four-for-one stock split, scheduled for today. This basically means (I’ll use round numbers) that each $500 share of Apple stock will be divided into four shares worth $125 each. Obviously this does not change the overall value of Apple, which recently made history by surpassing a $2 trillion market cap. But because the Dow is tied to measuring share price rather than overall valuation, it looks (to the Dow) like Apple shares are plunging from $500 to $125. So while in the real world Apple will remain as valuable as ever, in the Dow world, it will be worth one-fourth of what it was. This meant, to the Dow’s…