It’s time to ditch the Dow Jones Industrial Average

2014-10-11

Bloomberg
The Dow represents the intricacies of the broader market about as much as Wall Street represents the complexities of investing.

My boss, the editor of MarketWatch, recently decreed that this news site will no longer use pictures of traders at the New York Stock Exchange to illustrate what’s happening on the stock market.

Jeremy Olshan’s point was that it’s anachronistic to show traders today because “the stock market ditched Wall Street years ago,” to the point where what’s exchanged on the floor at 11 Wall Street now are “camera flashes, sound bites and high-fives.”

It’s a daring call for a news organization to make, if only because the public image of the stock market still emanates from that short, crooked New York street that starts at the river and ends at the graveyard, representing the entire scope of investing emotions in the few steps in between.

It’s also an appropriate first step in modernizing the public image of the market.

But as long as the media is willing to take that step and editors are going to consider making the news media represent a true picture of the modern market, let’s take things a big step further with something far more radical:

It’s time for the media to stop discussing the Dow Jones Industrial AverageDJIA, -0.69%  as if the index actually matters. Watch’s Chuck Jaffe’s video interview about the Dow’s irrelevance.

I’m sure that sounds like blasphemy to a lot of average investors, not to mention the brass at Dow Jones, which happens to own MarketWatch, my employer. The Dow is a staple of every market-oriented website, every radio station market update, every newspaper’s daily business section, and the centerpiece of the 20 seconds of coverage that every national newscast guarantees the investing world each day.

The problem is the Dow hasn’t been particularly important or meaningful in the investing world for a long time, probably for the many years since Dow Jones, the company, stopped having any relationship to the index itself.

“The market” hasn’t been synonymous with “the Dow” in the minds of most investing experts for over a decade now; when market watchers say “the market,” they typically mean the Standard & Poor’s 500 SPX, -1.15%   or, occasionally, the broader Wilshire 5000 Total Market Index W5000FLT, -1.21%

“The most popular things aren’t always the ones you should look at,” explains Martin Pring, president of Pring Research. “The Dow may be the best-known index to the public, but it’s no longer relevant in the investing world, it’s just a number that the public likes to watch that once meant something, but that you can ignore these days if you want to know what the market is doing.”

The Dow Jones Industrial Average may be the best known U.S. index of stocks, but most definitions for what it is get boiled down to “a price-weighted average of 30 actively traded blue-chip stocks,” and there are three significant issues within that half-sentence description.

Start with the 30 companies, most of them (but not all) “industrial” stocks; that’s the basis for a good sector index (at least if they all were industrial companies), and it might be enough to reflect performance of “mega-cap” stocks — the biggest of the big — but it’s too small of a sample to truly reflect the broad market.