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Dow: A good benchmark?
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March 16, 1999: 6:09 p.m. ET
Some question whether Dow's industrial slant has made it outdated
By Staff Writer Martine Costello
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NEW YORK (CNNfn) - When it comes to market benchmarks, there is no bigger name than the Dow Jones industrial average.
So, when the Dow briefly topped the 10,000 mark Tuesday, Wall Street reacted with the kind of hype and hoopla normally reserved for a big-time sporting event.
However, some market watchers say as a benchmark for the broad market, the Dow is vastly overrated. For starters, the blue-chip index is heavy on industrial stocks but light on technology stocks, the primary driver in the current bull market.
In fact, if the Dow had performed as well as the S&P 500 index since 1994, it would be above 13,000 today, according to Peter Canelo, U.S. Investment Strategist at Morgan Stanley Dean Witter.
"Everybody is all excited about this, but the Dow is the last one to go to the party," Canelo said, as the index toyed with 10,000 briefly on Tuesday before settling at 9,930.47.
The Dow includes 30 of the largest U.S. stocks, including heavyweights like aircraft maker Boeing (BA), computer titan IBM (IBM) and soft-drink maker Coca-Cola (KO).
With a combined market capitalization of $2.6 trillion, the Dow index has become synonymous with the market, said Richard Tofel, vice president of corporate communications at Dow Jones & Co.
"The Dow Jones industrial average is not a trendy index," Tofel said. "But it's an index that's proven over time -- in recent years and over the long run -- that it is highly correlated with other indexes, the broader market and the economy."
Yet conspicuously absent from the index are some of the biggest technology winners of the bull market -- like Microsoft (MSFT), Cisco Systems (CSCO), and Intel (INTC), Canelo said.
"I think the index has failed to keep up with the times," Canelo said. "There are too many companies missing."
The index also includes too many big industrial names, such as Caterpillar (CAT), Aluminum Co. of America (AA), DuPont (DD), and Union Carbide (UK).
Many experts think the S&P 500 is a better indicator of the market today.
"The Dow is certainly not the most representative index of the economy," said Andrew Addison, editor of the newsletter Addison Report. "The S&P 500 provides a much better benchmark because it has a much wider array of technology companies and it has 500 large corporations, and not just 30."
But old habits die hard, and people aren't likely to stop tracking the Dow any time soon, Addison said. The trick will be for them to look beyond the Dow and consider all of the market indicators -- such as the S&P 500, the Nasdaq Composite, and the Russell 2000.
Other critics point out that the Dow doesn't reflect the performance of the broader market. While the Dow is up 8.47 percent year to date, the Wilshire 5000 Index of all U.S. stocks has risen only 4.84 percent, said Jennifer Oppenshaw, director of investment services at Wilshire Associates of Santa Monica, Calif.
"The Dow is flawed," Oppenshaw said. "It is biased towards the very large companies, measures only about 20 percent of the market, and fails to appropriately weight stocks in the index."
But Al Goldman, chief market strategist at AG Edwards in St. Louis, Mo., argued that the Dow is still a valid benchmark.
"We're still an industrial nation," Goldman said. "Just because the Dow isn't the best indicator, doesn't mean we should throw it out."
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