Dow Jones: A Relevant Benchmark or a Relic of the Past?

The Dow Jones Industrial Average (DJIA) has recently made headlines by experiencing its longest consecutive losing streak since 1978. From December 5 to December 19, 2024, the DJIA fell for 10 straight days. In contrast, other indices like the S&P 500, tracked by the SPDR S&P 500 ETF Trust NYSEARCA: SPY, remained relatively stable with just six losing days. On December 19, this index dropped by 3%. Meanwhile, the Nasdaq 100, monitored by the Invesco QQQ NASDAQ: QQQ, initially reached a new all-time high before facing a 4% decline during the same period, marking seven days of losses.

Despite this, many evening news programs continue to refer to the DJIA as "the market," rather than acknowledging the broader S&P 500 or Nasdaq indices.

Is It Time to Move Beyond the Dow as a Market Reference?

For those focused on the S&P 500, the idea of a historic losing streak might seem farfetched. Despite the DJIA's consistent decline, the S&P 500 maintained a degree of stability. Historically, indices like the DJIA, SPY, and QQQ moved in tandem, but diverging trends raise questions about which benchmark truly represents the broader market. When people say, "the market is down today," they should consider whether the DJIA, comprised of only 30 companies, is the best reference point, or if a more expansive index like the S&P 500 is more appropriate.

Is the DJIA Too Narrow of a Measure of the Markets?

The DJIA is a price-weighted index, consisting of merely 30 stocks. These companies are among the largest and most established in the U.S., intended to reflect the country's economic status. However, the price-weighted nature means that higher-priced stocks heavily influence the index. This presents a downside; if a stock splits, it can significantly alter the index's value. Critics argue that the DJIA may not accurately measure the financial market's performance or the U.S. economy.

Established back in 1896, the original DJIA comprised 12 stocks, later expanding to 20 in 1916 and reaching its current size of 30 in 1928. None of the original stocks are present today; instead, a selection committee replaces underperformers with new stocks. Notably, Procter and Gamble Co. NYSE: PG is the oldest constituent, having joined in 1932. This replacement method suggests that a larger index size could yield a more accurate representation of market performance.

Is the S&P 500 Index the True Benchmark for the U.S. Markets?

The S&P 500 was introduced by Standard and Poor’s in 1957, created to track the 500 largest public companies in the U.S. This index aims for a broader representation of the economy and includes a comprehensive range of sectors and industries. The S&P 500 is widely recognized as the most accurate benchmark, with its futures contracts being among the most heavily traded worldwide.

Investment funds frequently use the S&P 500 as a benchmark to measure their performance. Unlike the DJIA, which is price-weighted, the S&P 500 is market capitalization-weighted, meaning that companies with larger market caps exert more influence on the index's value. Currently, the top seven largest companies account for nearly 30% of the total S&P 500 index.

Although a larger number of stocks in the DJIA would likely provide a better indicator of the markets, the S&P 500 is considered the leading reference for understanding the U.S. economy and stock markets.

For a different perspective, investors might consider the S&P 500 Equal-Weight index, represented by the Invesco S&P 500 Equal-Weight ETF NYSEARCA: RSP. The performance difference is notable, with the SPY rising 24.4% year-to-date, while the RSP has only seen a 12% increase as of December 20, 2024.

Should You Invest $1,000 in SPDR S&P 500 ETF Trust Right Now?

Before investing in the SPDR S&P 500 ETF Trust, it's essential to gather more insights.

Market analysts monitor stocks daily and have identified top-rated stocks that may perform better. Interestingly, the SPDR S&P 500 ETF Trust is not currently on their recommended list.

While the SPDR S&P 500 ETF Trust holds a "Hold" rating from these analysts, there are other stocks that they suggest as better investment opportunities.

Investors should always seek informed advice before making financial decisions.

Dow, S&P, Benchmark