This morning’s briefing shines a light on the Dow Jones breaking its longest losing streak since the 1970s, with a modest rise of 0.04% on Thursday. The performance of this iconic index this week serves as yet another signal of its waning importance compared to the S&P 500, firmly transitioning from a key player to a historical marker in market analysis.
Ahead of the Fed’s announcement-driven market upheaval on Wednesday, the Dow’s performance diverged from the S&P 500 and the Nasdaq, stuck in what can only be described as a historical slump. A slice of the struggle stemmed from unfortunate timing; while almost all members of the “Magnificent Seven” stocks rose in value, the Dow missed out on Tesla and Alphabet, the two major gainers. Instead, it carried Nvidia, having faced a challenging month. Back in November, the index made the switch by dropping the underperforming Intel for Nvidia.
The situation didn’t improve with UnitedHealthcare’s contribution, seeing a significant decline of about 20% this month, doubling the losses experienced by Chevron, the next poorest performer.
Yet, the bigger issue here isn’t just bad luck. It’s how the Dow calculates its numbers. The index uses a price-weighted method rather than looking at market cap, meaning stock prices alone influence its outcome without considering share quantity. While this might have been practical in an era with limited data and slower calculations, today’s ease of access to detailed information makes it look outdated and puzzling, as reflected in our featured Chart of the Week.
To illustrate, UnitedHealthcare, trading at nearly $500 per share, holds 7% of the Dow’s influence despite having a market value of $452 billion. Meanwhile, Microsoft has a lower share price at third weighting with 6%, despite being almost sevenfold larger in market cap. Such disparities can also be seen with Sherwin Williams, which is weighted 1.5 times more than Apple yet valued at only 2.3% of Apple’s total worth.
Price movements add another layer of complexity. A $10 shift is equal across stocks, but its impact varies drastically—a 50% surge for a $20 stock versus just 5% for a $200 stock, yet the Dow treats these movements equally.
The Dow is not alone in using price-weighted indexing; Japan’s Nikkei 225 does the same, as opposed to using a method that considers the overall value of the components weighted by size. Keeping this methodology in mind helps when analyzing market headlines and statistics, as every once in a while, we see the drawbacks of “Price-weighted indexing gone wrong” play out in real time.
