The Market is UP! -- What exactly is “The Market”?
December 11, 2017
We’ve all heard news and seen headlines like “THE MARKET HITS NEW HIGHS, TOPS 24,000 FOR THE FIRST TIME EVER”, but what are they talking about, and how does that relate to my investments? In most cases, mainstream media (and your next-door neighbor) are talking about the Dow Jones Industrial Average (DJIA, or sometimes just called The Dow).
The Dow is hardly representative of the financial markets as a whole. In fact, the DJIA only includes 30 stocks of large U.S. companies, and the computation is a is a simple “average” where stocks with higher stock prices are given more weight than stocks with lower prices. For example, the stock with the highest price in the DJIA is currently Boeing (BA). Its stock price at the start of today was $269.91. It closed at $276.80 for a gain of 2.78%. The stock with the lowest price in the DJIA is currently General Electric (GE), which opened today at $18.55. For GE to move the DJIA as much as Boeing today would have required a gain of $7.50, or 40%. The takeaway here is that the DJIA may show general stock market movement, but absolute values and percentage gains or losses may have little bearing on your portfolio.
When the news media reports “Today was a Mixed Market”, they are referring opposite movements between the DJIA, the Nasdaq, and the S&P 500 index. The NASDAQ you see reported is actually the Nasdaq 100 which consists of the largest U.S. and International non-financial companies listed on the NASDAQ market. Since it is dominated by technology-oriented companies, most people consider this the “tech index”. Unlike the simple formula used to compute the DJIA which is price-weighted, the NASDAQ uses a proprietary modified market-value weighting formula.
The S&P 500 stands for Standard & Poor’s 500 index, and as the name implies, it consists of some of the largest companies traded on U.S. markets selected by a committee to represent multiple industries. The S&P index is calculated with a market-value weighting formula. Using this broader swath, The S&P 500 is a much better indicator of “The Market” movement than either the Dow or the NASDAQ.
Although the S&P 500 is a decent gauge of “The Market” keep in mind that it does not include any small or mid-sized companies, doesn’t consider many foreign-based companies, and doesn’t consider the bond market. Your individual diversified portfolio likely has parts of all these asset classes, so the performance of an index, whether it’s the Dow, the NASDAQ or the S&P 500, will not track with the performance of your portfolio. Best advice: Stick to the portfolio strategy you worked out with your advisor, and don’t pay any attention to the news’ reporting of how much “The Market” has gained or lost each day.