redesign | journalism: Why the Dow Jones Industrial Average is a terrible metric

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It’s the number that we hear about the most when journalists talk about the economy: the Dow. What is the Dow exactly? It’s a basket of 30 stocks. The full name, which we rarely hear, is the Dow Jones Industrial Average. It reflects 30 companies, which are supposed to be representative of the economy.

Today, these 30 stocks are hardly representative of the economy. Only recently was Apple added to the Dow. Apple is so big that its market capitalization exceeds that of the eight lowest value Dow companies combined. Service businesses have become so big that only eight of the stocks in the Dow Jones Industrial Average are actually industrial companies.

It’s great marketing for Dow Jones & Co. (now owned by News Corp., which also owns Fox News and the Wall Street Journal).

A better, broader metric of the economy is the S&P 500.

There’s another, more important, reason why journalists should focus on Standard & Poor’s 500: Its performance directly affects the well-being of many Americans. A lot of us invest (through retirement plans) in index funds that seek to replicate the performance of the S&P 500.

The Dow gets more glory, but the S&P 500 is what matters.
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