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

December 23, 2024 at 11:06 AM EST

Assam, india - September 12, 2020 : Dow jones logo on phone screen stock image. - Stock Editorial Photography

The Dow Jones Industrial Average had the longest consecutive losing streak since 1978, falling for 10 straight days from December 5 to December 19, 2024. Meanwhile, the S&P 500 index, as tracked by the SPDR S&P 500 ETF Trust (NYSEARCA: SPY), was in a relatively flat trading range with six losing days before sliding 3% on December 19. The Nasdaq 100 index, as tracked by the Invesco QQQ (NASDAQ: QQQ), actually climbed to a new all-time time before sliding 4% during the same period with seven red days. Evening news programs still refer to the Dow Jones Industry Average (DJIA) as "the market" rather than the S&P 500 or the Nasdaq 100.

Is It Time to Move Beyond the Dow as a Market Reference?

If you were only following the S&P 500 index, you wouldn't be thinking the market was having such a historic losing streak. However, the DJIA was sinking every day during that period, painting a gloomy climate. The DJIA, SPY, and QQQ used to all move in lockstep historically, but the divergence has been growing. This calls into question which benchmark index truly represents "the market." When people say, "the market is down today," should they really still be using the DJIA, which is only comprised of 30 companies, as the reference or a wider sample of stocks like the S&P 500 index?

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

The DJIA is a price-weight index comprised of just 30 stocks. These 30 companies represent the largest and most established companies to provide a barometer of the U.S. economy. A price-weighted index is one where each constituent's price makes up a fraction of the index, as higher-priced stocks will have a greater impact. The problem with a price-weighted index is that if a constituent undergoes a stock split, it will severely impact the value of the index. Critics argue that the DJIA index is no longer an accurate measurement of the financial market’s performance or the U.S. economy.

Established in 1896, the original DJIA index consisted of 12 stocks, which progressively expanded to 20 stocks in 1916 and finally to 30 companies in 1928. It has remained with 30 stocks since then. None of the original 12 stocks remain in the index today. Rather than expand the index, a committee regularly replaces underperformers with new stocks. The Proctor and Gamble Co. (NYSE: PG) is the oldest constituent in the DJIA index, having joined in 1932. The argument is that a larger sample size would paint a more accurate picture of the market's performance.

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

The S&P 500 index was created by Standard and Poor’s in 1957 to track the 500 largest public companies in the United States. The goal was to get a better representation of the U.S. economy and the U.S. equity markets with a more comprehensive list of companies categorized by 11 sectors and 24 industries. The S&P 500 is widely believed to be the most accurate representation and primary benchmark index, which is why the S&P 500 futures are the most heavily traded index futures contract in the world.

It's also the benchmark that compares performance for investors and fund managers (IE, funds often compare their performance to the S&P 500 index). The S&P 500 is a market capitalization-weighted index, which values constituents by market cap (not price like the DJIA index). The problem with a market-cap index is that the largest companies have the most impact on the index value. The Magnificent Seven stocks control nearly 30% of the total S&P 500 index.

While a larger number of stocks in the DJIA index would likely be a more accurate indicator of the U.S. markets, the S&P 500 index should be referenced when it comes to the most accurate barometer of the U.S. economy and U.S. stock markets.

For an even playing field, investors can use the S&P 500 Equal-Weight index represented by the Invesco S&P 500 Equal-Weight ETF (NYSEARCA: RSP). The difference in performance is stark. The SPY is up 24.4% compared to the RSP, up 12% year-to-date (YTD) as of December 20, 2024.