The Dow Jones Shedding Streak Confirmed Its Massive Weak point: Chart of the Week

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With its 0.04% acquire on Thursday, the Dow Jones lastly ended its 10-day shedding streak, the worst for the reason that Seventies.

This week’s efficiency was one other reminder of why the traditionally vital index is now extra historic than vital, after lengthy ceding its position to the S&P 500.

Earlier than the market dramatic reaction to the Fed On Wednesday, the Dow Jones was in opposition to the S&P 500 and the Nasdaq and was in a historic funk.

A lot of the why got here from a dose of dangerous luck: whereas nearly all shares within the Magnificent Seven have been up, the Dow Jones publicity missed the 2 greatest winners – Tesla and Alphabet – and moderately had Nvidia, which I had a difficult month. (The Dow lately added Nvidia in November, which Intel in trouble out.)

On high of that, the Dow Jones had UnitedHealthcare, which fell about 20% this month, posting losses twice as giant as the following worst performer, Chevron.

However this dangerous luck hides the “actual drawback,” which has been the nice benefit of the index for therefore many many years: its price-weighted indexing. As a substitute of utilizing the market capitalization system, the index is calculated from inventory costs, that are solely linked to the precise valuation when making an allowance for the variety of shares. Nice for the pre-Web period if you needed to calculate shortly with little data, however now it produces some mind-blowing statistics, as our chart of the week reveals.

For instance, as a result of it trades at practically $500 per share, UnitedHealthcare ($452 billion market cap) is second within the Dow, at 7%. Microsoft, which has a decrease share value, is available in third, with 6%. However Microsoft is price nearly seven occasions extra.

You are able to do this for a lot of of them: Paint firm Sherwin Williams has a weighting of about 1.5 occasions that of Apple and is price simply 2.3% of what the tech big is price.

And costs do not simply rank shares for weighting functions; they make them transfer in another way. A $10 transfer is similar irrespective of which firm we’re speaking about, although it is a whopping 50% bounce for a $20 inventory and a a lot smaller 5% commerce for a share of $200. The index would not care.

The Dow Jones is just not the one index to make use of this methodology. Japan’s Nikkei 225 index can also be price-weighted as a substitute of utilizing the market capitalization methodology which makes use of the combination worth of elements, weighted by their measurement.

Having this in thoughts is useful when analyzing headlines and statistics in regards to the state of the market, as a result of each infrequently we have now one other episode of “Value-Weighted Indexing Gone Incorrect.”

The story continues