Why Dow 10,000 is About as Meaningless as You’d Expect

10/15/09 Stockholm, Sweden – Now that Wall Street hearts are a-flutter with Dow 10,000, it’s worth taking a moment to figure out what the Dow Jones Industrial Average actually tells us about its components. The Dow is a share price-weighted average, meaning that when the index is figured out the companies with larger share prices carry more weight.

This means that the companies currently with the largest share prices make up a greater portion of the Dow’s weight than other companies with a lower share price. These large share price companies include IBM (nearly 10 percent of the Dow), 3M (over 5 percent), and Chevron (over 5 percent), among others.

The Dow components that have been hit the hardest, like Bank of America and Pfizer, now carry substantially less influence on the Dow as a whole. General Electric, for example, has only a 1.27 percent weight in the Dow.

It’s another example of how the ongoing parade of “encouraging” numbers seem to ring hollow when you dig a little. See The Reformed Broker for the full analysis and more insight into how the Dow broke 10,000 because IBM shares haven’t split very often.

Rocky Vega

Rocky Vega is a regular contributor to The Daily Reckoning. Previously, he was founding publisher of UrbanTurf and RFID Update, which he operated from Brazil, Chile, and Puerto Rico, and associate publisher of FierceFinance. He specialized in direct marketing at MBI, facilitated MIT Sloan School of Management programs, and has been featured on CBS. Vega graduated with honors from Harvard University, where he was on the board of Let’s Go Publications and directed business programs involving McKinsey, Goldman Sachs, and Harvard Business School faculty. He is also enrolled at the Stockholm School of Economics.

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