Dow 10,000! Now go back to living your life

  • Share
  • Read Later

Well, we did it. Today we crossed Dow 10,000. Can Dow 36,000 be far behind?

Let me explain my mockery: no one knows what the stock market is going to do next and, as I’ve argued time and again, ordinary investors shouldn’t particularly care. Sure, some of us like to pretend that all of this 1) matters a great deal, and 2) can be figured out with a moderate amount of concentrated thought. Take, for example, my story from yesterday about how the rally might be running out of steam.

Yet in the bright light of day, most people will admit that what the stock market does in any given session isn’t all that significant—even if it crosses a threshold that seems like it should be really important for creatures that count in base 10.

Here are some more reasons not to care about Dow 10,000:

1. This isn’t your father’s Dow. Or even your Dow. Remember back in June when we took Citigroup and General Motors out of the Dow and put in Travelers and Cisco? We’re comparing apples to rotten apples here. If GM were still in the Dow, coming off its post-Cash for Clunkers high, do you think we’d be talking Dow 10,000? I doubt it. In a way, we’ve stacked the deck.

2. The Dow isn’t terribly important to people who actually do things with money. “Dow 10,000” looks great in a headline, but very few professional investors pay the Dow much mind. We are talking about only 30 stocks, after all. Fund managers tend to care much more about the S&P 500, Nasdaq composite and Russell 2000—broad indexes that, as such, give a better gauge of how companies overall are doing.

3. The Dow has been a laggard of late, which should tell us something. Since the beginning of the year, the Dow has risen about 14%. Meanwhile, the S&P 500 is up some 20%. Foreign stock indexes have risen even more. If the Dow were keeping pace with these other averages, we wouldn’t be having this conversation about Dow 10,000; we would have already had it. That underscores the artificiality of the link between the number 10,000 and what’s actually going on in the world.

4. The Dow Jones Industrial Average is an average, not an index. If you turn to page 19 of your hymnal, you’ll see that since the Dow predates Irving Fisher’s push to bring indexing to the stock market, it’s actually just a plain old mathematical average. Meaning: companies with higher stock prices pull more weight, irrespective of how many shares they have outstanding. To quote Justin: “This measure generates some deeply weird results.” In 2007, GE sold at $36 a share and Caterpillar at $72. So Caterpillar had twice the impact on the Dow as GE—even though Caterpillar’s overall stock market capitalization was just 12% of GE’s.

In summation: Dow 10,000—yay! Now everyone back to what you were doing.