Have you ever wondered why trillions of investment dollars are indexed to the Standard & Poor’s 500 (^GSPC) Index but almost nothing, relatively speaking, is tied to the Dow Jones Industrial Average (^DJI)?
Go no further than yesterday’s market. (Feb. 2)
The S&P was up a very nice 1.47% for the day while the Dow finished down 0.11%. And guess what? A single stock, UnitedHealth Group (UNH), accounted for a good part of that difference because of the hinky way that the Dow is calculated.
As we’ll see in a bit, the difference between the way the S&P and the Nasdaq (^IXIC) are calculated and the way the Dow is calculated account for most of the huge differences we saw between the two indices and the Dow last year—and the huge differences we’re seeing so far this year.
Or for that matter, this week.
For the first four days of the week, the Nasdaq was up 5%, in good part because Meta (META), which was formerly Facebook, was up 23% on Thursday. The S&P was up 2.7%, the Dow barely broke even, up a mere 0.2%. (Even if we took UnitedHealth out of our calculations, the Dow would have been up only 0.5%.)
The fact that one stock like UnitedHealthcare—which isn’t exactly a famous household name—can have such a big impact distorts perceptions. And it’s a reason that you shouldn’t pay much attention to the Dow, no matter how much market commentators talk about it.
Now, let’s go back to UnitedHealth and I’ll show you the way it whacked the Dow on Thursday at market close when it fell $26.12, which shaved a whopping 172 points off the Dow. That’s more than four times the Dow’s 39-point loss for the day.
How can one stock have such a big impact on the Dow?
It’s because the Dow is an average—not an index.
When the Dow first started, in 1885, it was calculated by adding up the prices of its 12 stocks and dividing it by 12. Back then, that was the only way to calculate a market indicator. But these days, there’s lots more information—such as the total market value of individual stocks—available almost instantaneously than there was 138 years ago.
That’s how Standard & Poor’s created the S&P 500 in 1956 and the National Association of Securities Dealers founded the Nasdaq in 1971.
The Dow, by contrast, is still an average. But calculating it gets complicated. You add up the prices of its 30 component stocks and divide the sum by something called the Dow divisor. These days, the divisor—which we’ll discuss some other time—is precisely 0.15172752595384, according to Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices.
A $1 change in any of the Dow’s 30 stocks moves the Dow by 1 divided by the divisor. Or, for our purposes, 6.59 points.
At $470.83 a share, UnitedHealth is the Dow’s highest-priced stock. By far. So a $1 move in UnitedHealth is pretty much meaningless to holders of UnitedHealthcare—but for the Dow, that $1 change counts the same as a $1 move in Apple. In the S&P 500, which is based on each of its stocks’ market value, a $1 move in Apple (AAPL) counts about 17 times as much as a $1 move in UnitedHealth. That’s because Apple has about 16 billion shares outstanding, compared with 947 million shares for UnitedHealth.
The difference between the way the S&P index is calculated and the way the 30-stock Dow average is calculated is why investors flock to S&P index funds and almost totally ignore the Dow. That’s because the S&P is a better reflection of market reality than the Dow is.
The most recent available numbers—from year-end 2021—showed $7.1 trillion indexed to the S&P and just under $40 billion tied to the Dow. But even though the Dow has approximately zero market share when it comes to investors’ money, it’s got huge mindshare. When you read or see or hear daily stock market stories, the Dow is always in there, often the first indicator mentioned.
Last year, the Dow outperformed the S&P and the Nasdaq by stunning margins. The Nasdaq was down a distressing 34% and the S&P, which has both over-the counter (OTC) stocks and stocks that trade on the New York Stock Exchange, was down 19%, but the Dow was down only about 9%. That’s largely because a handful of big stocks that aren’t in the Dow—but have serious weight in the S&P and huge weight in the Nasdaq—got clobbered last year.
A few examples: Tesla (TSLA) was down 65%, Meta was down 64%, Amazon (AMZN) was down 49%, Alphabet (GOOG), which was formerly Google, was down 39%.
This year, the pattern has reversed. Through yesterday, thanks largely the recent sharp rise in many of those four stocks and some other big stocks that tanked in ’22, the Nasdaq was up 17% year to date, the S&P was up 9%, the Dow up a mere 3%.
Are these wide differences among the three major market indicators going to continue this year? I don’t know, nobody knows. But I do know that although the Dow is a sort of outdated relic, it’s hard to resist writing about it. After all, it’s the market indicator we’ve all grown up hearing about.
So listen to the Dow news all you like—just don’t care about it. And don’t let it influence your investment decisions.
Allan Sloan, who has written about business for more than 50 years, is a seven-time winner of the Gerald Loeb Award, business journalism’s highest honor. He’s won Loebs in four different categories over four different decades.
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