“In other news the Dow dropped 1,000 points in an unprecedented decent.  Months ago the Dow was steady at 13,000, it is now below 8,000″

I’m sure you’ve heard or read something similar to the statement above.  You see that statement like Shepherd Smith or Wolf Blitzer does, reporting on such horrible news but not understanding exactly what it means.  Yes it’s true that kind of move in the Dow is rarely good news.  However it shouldn’t be news at all.  A metric that changes every day is not worthy of Brian Williams’ time.  Perhaps he could mention the Dow is down 30% or something for the year, but this day to day nonsense needs to stop.

The beginning of the end should be with the death of the Dow.

OK the beer can live, but the index must die.  We learned yesterday that a price weighted stock index like the Dow gives more importance to a company with a higher stock price, regardless of how much the company is actually worth.  As of September of this year, IBM had the highest stock price in the Dow.  This technically makes IBM the most important company on the planet.  The daily movements of IBM’s stock price have more impact on our perceived economic health than any other company  By this I mean a 1% move in their stock price moves the Dow (and thusly our perception of economic health) more so than the other companies..  Nevermind that fellow Dow buddies Microsoft and GE are both worth 70-80% more.

There’s another reason the Dow is awful, it’s short.

The Dow Jones Industrial Average is a list of 30 stocks.  30 is nothing, and no it is not more important because it is the 30 largest companies in the US.   The media gives preference to the Dow (just watch CNBC at any time).  The minute-by-minute moves in the Dow have in affect on how we perceive the economy.  So when one company in the Dow has a really bad day, it is perceived that the entire economy tanked.  Here are some examples:

Aerospace company Boeing is on the Dow.  Aerospace company Lockheed Martin is not.  They are competitors and about the same size.  They are both bidding on a new jet fighter for the US Air Force.  Let’s say Lockheed wins the bid and Boeing is sent packing.  Boeing’s stock price falls on the news, moving the Dow down, creating the perception of a down day for the economy.  The contract was still given to an American company.  Money will be made, jobs are held.  But since the Dow is small and only includes Boeing Brit Hume’s face will sag a little lower.

Coca-Cola is also a Dow company.  Coca-Cola used to have cocaine in it.  What would happen to Coke’s stock price if it was learned a different ingredient in the soda is bad for you and banned by the FDA?  Coke’s brand is now tainted, the company may not recover, and the Dow falls.  Now Katie Curric reports the news and all is sad.  Many people will lose their jobs, but our economy will move on without the maker of a soft-drink.  The Dow won’t though and our economy will be perceived as hurt by this.  Let if be known, I love Coke (diet) and wish them the best.

The final example is pharmaceutical giant Pfizer.  Pfizer has a new miracle drug that cures genital herpes (the modern day scarlet letter).  It pasted clinical tests with flying colors and the stock price was pumped up over the excitement (bringing the Dow with it) at the prospect of new big profits.  At the last second, the FDA decided that the albino bat poo used in the cream is not yet safe for human use and bans the cream.  Pfizer’s stock tanks, the Dow comes with it.  Of course, so does our perception of economic health.  A few million in research dollars are lot, but that is hardly cause for concern about the economy.

All three examples are made up, but their potential still exists.  It is unfair for events like these to have any impact on our economy.  But it does.  The Dow is falling, you as an investor see the movements and pull out of your investments.  A chain reaction of high volume selling drives the price down of all stocks, all markets tank, and the “economy” has a bad day.  All for bat poo.

The Dow remains important for two reasons.  The first is because it’s old and Americans are traditional idiots and love old things, despite its relevance.  The other is because the 30 stocks represent the American Brand.  If these companies fail, we’re all screwed we think.  Not so fast Pessimistic Patty.  The backbone of this country is SMALL business.  Mom and Pop shops, your local gas station, that local company that employs 1,000 people.  That is what actually runs America.

Our economic health cannot be measured by one metric.  If you want to measure the status of big companies, use the S&P 500.  S&P includes the Dow, and all of the Dow’s company’s competitors.  No one company can move the S&P very much in a given day.  An exception would be if one company became the same size as all the others combined.  But then it would actually be more important to the stock market.

If you want to measure the health of the stock market, follow the Wilshire 5000, which includes (you guessed it) 5000 stocks.  Throw in your quarterly GDP date, the price of oil, and the Greenback vs Euro numbers and you can actually get a much better idea of the economy.

But all of this should be null and void.

You shouldn’t know what the Dow is every day.  You shouldn’t even know what the S&P 500 is in a given week.  Once a quarter is sufficient, but even that is overkill for some.  The only reason you should care about the daily movements of any index or metric is if your work ethic changes based on it.  If the Dow tanks 10% today, are you going to work 10% less tomorrow so the economy actually does suffer?  If the Dow goes up 10% are you going to work 10% harder?  No on both fronts.

I’ve told you all this because I want to help change the way Americans view the economy.  Anyone who talks about the Dow and pretends it’s important should be ignored.  And since most people do that, ignore most people.

Weak.

By The Weakonomist

The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics.

categories: economics, investing, media