He writes
the Dow is a crummily constructed index covering a small and curious sample of companies. If you really wanted to know how the stock prices of that curious sample of companies were moving, you’d really want to see some proper weighting going on. But how many of the people looking at the Dow know, or care, about this weighting? How many know, or care, about the identify of the companies in the index? Are we sure that the S&P is a more accurate measure of market movements? What sort of movements are we interested in anyway?
This can’t be said enough. Sometimes its worth, you know giving the data at least a cursory look. You see this in index construction all the time. Folks will moan to high heaven about how this index is fundamentally flawed.
But, then you take an index which analytically must be overstating the underlying concept you are interested in and one that must be understated. Put them together and you can’t see a difference. Does it stop the moaning? Unfortunately, not.
Some things matter, but most things don’t.
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Wednesday ~ February 22nd, 2012 at 3:49 pm
bdbd
Maybe we should start saying “Dow” with a Homer Simpson accent?
Wednesday ~ February 22nd, 2012 at 5:32 pm
Phil Koop
It is curious and presumably significant that two economists should overlook the obvious so comprehensively. Here is a very important practical difference between the Dow and the S&P 500: the latter is a traded asset. OK, an index is not literally a traded asset, but you can buy and sell the S&P 500 portfolio in humungous amounts at very skinny spreads. Try that with the Dow.
R.A. goes on to say “Sure, except that there is value in watching the same thing that everyone else is watching.” Value to whom? And who exactly is “everyone else”? “Everyone” is watching the Dow in the same sense that everyone is watching Justin Bieber. Perhaps that is of interest to an anthropologist. But the market is not a democracy; it’s one dollar, one vote. And in that weighting, nobody is watching the Dow.
Thursday ~ February 23rd, 2012 at 5:02 am
reason
Ryan Advent is sensible enough that I might eventually consider renewing my Economist subscription, after whoever was Lexington during the first half of the Bush administration drove me away.