![]() ![]() emerged from World War II into the boom years of the 1950s and 1960s, “when we - as a country, not just a group of economists or investors - began looking to statistics as a way of gauging what’s happening in the economy as a whole.”Īnd he pointed out that index values for the Dow, S&P and Nasdaq, reported daily or multiple times per day on broadcast news, “is different than unemployment, the consumer price index or - which are at best monthly measures. Some investment advisers, including Statman, think we should all pay less attention to the daily fluctuations in these indexes, whether points or percents, and focus on the long term.īut economic historian Stapleford said our collective obsession with market index numbers is associated with a broader cultural change that occurred as the U.S. “This way, people don’t have to keep in mind the current level of the index to make sense of what 500 points on the Dow are.” “Surely it would be better if results are reported in percentages,” Statman said. “If you have a 100-point move in the Dow index,” Sylla said, “that’s three-tenths of a percent. Right now, the S&P 500 index is in the low 4,000 range, the Nasdaq composite is in the mid-14,000s, and the Dow Jones Industrial Average is in the high 34,000s. That’s because each index has a different baseline, said Richard Sylla, emeritus finance professor at New York University. One thing nearly everyone agrees on: Ignore the point changes, it’s the percentage changes that matter. “So a 1% change in the price of Apple has greater effect on the index than, say, Macy’s, which is among the smallest.” “Each of those stocks is weighted by the market value of all the stocks in that index,” said Santa Clara University finance professor Meir Statman. In other words, the cost of a share is multiplied by how many shares have been issued. But that $1 change in the $10 stock has the same effect on the movement of the overall Dow Jones as the $1 change in the $100 stock.”īy contrast, the S&P 500 and Nasdaq composite - developed decades later - include far more companies and weight them according to their market capitalization. A $1 change in a $100 stock is only 1%, and that’s a much smaller issue. “So think about a $1 change in a $10 stock. The Dow’s biggest problem today, Stapleford said, is that it’s weighted by the prices of shares, which can vary a lot. Some companies were dropped and others were added, bringing the total to 30 companies. The average was adjusted for things like stock splits and mergers. It started out around $30, and a point was $1.īut in subsequent decades, that 1-point-to-$1 equivalence went away. The Dow Jones Industrial Average was literally that: the average cost of a share in those companies. In 1896, they started publishing a new stock average in the financial newspaper they created - The Wall Street Journal - based on 12 big industrial companies. They want to get some sense of what’s happening in the overall market over time.” “They thought about the market as being like a wave that had peaks and valleys, thinking traders want to do more than just track individual stocks. And 10 of those stocks were railroad stocks, the other two were Western Union and Pacific Mail, which was a steamship company,” Stapleford said. “ In 1884, they started calculating an average of the prices of 12 stocks. “Charles Dow and his partners Edward Jones and Charles Bergstresser were putting out a two-page bulletin that they would circulate in the firms in Wall Street,” explained Thomas Stapleford, an economic historian at the University of Notre Dame and author of the book “The Cost of Living in America: A Political History of Economic Statistics.” Think back to 1884: Men of means were wearing silk top hats and speculating in railroad stocks. We’ll start with the Dow - it’s the oldest stock index, and it’s calculated differently from the others. What constitutes a point on the Dow, Nasdaq or S&P? Marketplace listener Ken Wonder of Bloomington, Indiana, posed this “I’ve Always Wondered” question: ![]() Ever wondered if recycling is worth it? Or how store brands stack up against name brands? Check out more from the series here. This is just one of the stories from our “I’ve Always Wondered” series, where we tackle all of your questions about the world of business, no matter how big or small. ![]()
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