Dow Jones: What’s the fuss?
Last week, in an attempt to dazzle the deaf, President Trump scheduled a press conference chronicling his administration’s early success. As proof of a strong economy, President Trump touted the recent uptick in the Dow Jones Industrial Average (DJIA).
In all fairness — it should be noted, that under President Trump, the Wall Street Journal run equity index had its biggest gain in the first 30 day of a new administration since 1909. Further, while former President Obama (#missyoualready) rarely highlighted the DJIA’s surge under his tenure as a sign of economic growth, ardent supporters of the 44th President often cited it as source of financial progress.
And they are not alone in paying attention to this financial measuring stick. CNBC, Fox Business, CNN, and many other news networks provide up-to-the second tracking of the Dow. When Planet Money, a NPR podcast, did an episode questioning the relevance of the DJIA, they had to note that even their parent company tracks the index.
So, what is the Dow Jones tracking? It is it a good proxy for measuring U.S. economic health? If not, what are some better ways to assess the state of our economy? Let’s examine the financial fuss.
What comprises the Dow Jones Industrial Average?
Since 1896, The Dow Jones Industrial Average tracks 30 large publicly owned companies based in the United States that have traded during a standard trading session in the stock market. Some companies in the index include Goldman Sachs, Chevron, ExxonMobil, Apple, McDonalds, and IBM.
Why did we originally care about this Index?
In the postwar rise of the 1950s, when the economy was growing rapidly, and the wealth was widely shared, tracking 30 large American companies was a sound measure of most everyone’s personal income. Back then, the U.S. was a largely self-sufficient nation, so global economic woes were largely ignored by US policymakers. There was also less national inequality and everyone’s income tended to move in the same direction. What was good for an industrial giant like GE really was good for the nation.
Is the DJIA a good metric to evaluate equity or economic health?
For starters, a small fraction of American’s own the majority of public stocks. Secondly, most public pension funds have opted out of investing asset managers who focus on Dow companies. In reality, the Dow stopped by a being a sound gauge for economic progress in 1990.
Instead, it became the driving force for growth. During the rise of the tech boom, the hottest companies weren’t building revenue by selling profitable products and services — they were selling illusions to stock investors. The Dow’s rise hid a historic fracturing: one group, enriched in part by the instant wealth of the bubble, saw its income grow faster than ever while the lower classes’ share of overall wealth deteriorated. Today the Dow recent sure can be attributed to quantitative easing by the Federal Reserve. An action that has given the ultra-wealthy greater means for speculation.
Further, the current composition for the Dow is an incomplete assessment of the stock market on several levels. First, the Dow Jones does not include dividends nor do the 30 companies list serve as a who’s who of public markets. Facebook, Google, and a litany of other large tech firms are not included the Dow Jones.
More troubling might be the fact that the DJIA weighs stocks per share price rather than market capitalization. As a result, a 1% price change of IBM, which closed at about $120 in mid-August, counts about six times as much in the Dow as a 1% change in Intel, which closed at $19, even though IBM’s market value is only 51% greater than Intel’s.
Yet the Dow’s biggest drawback, is that it doesn’t provide a lens into an evolving interconnected global economy. 30 US based organizations may have been a solid economic proxy back when the index was created in the late 1800’s, but given the new global economic order, the DJIA fails to capture the global nuances of current financial markets. Dell, Intel, IBM, and McDonalds all derive more than half the profits from outside America. What’s good for these multinational corporations doesn’t always translate into growth state side.
What are some better alternatives to observe economic growth?
This is a difficult question. Traditionally, key measures of economic performance include Real GDP growth, labor force participation, labor productivity, unemployment, wage growth, and income inequality. But all of these metrics have some flaws. Bottom-line, evaluating economic growth is a complex endeavor, and no signal variable can adequately assess the state of our economy.
Writer Alfred Montapert once suggested, “Do not confuse motion and progress.” While it may be enticing to tout statistical superlatives to support political platforms, it is us on to genuinely decipher what is motion and progress. Because given the Commander-In-Chief last engagement with the press, he’s not interested in understanding the difference.