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Some truth about the DOW & S&P 500 -- they are a rose-colored glasses marketing campaign
Built For Marketing: Why The S&P 500 And Dow Are Misleading Investors
Here, some history is useful. The Dow, which dates back to 1896, was created by Wall Street Journal editor and Dow Jones & Co. cofounder Charles Dow as an easy way to express market trends. Initially, he added together the closing prices of 12 frequently traded stocks, divided that sum by 12 and printed the result. Over time, as stocks were added or existing ones split or otherwise changed their capital structure, the divisor was changed to allow for continuity. The Dow now contains 30 stocks. It is a price-weighted index, meaning stocks with higher prices have more influence in the index. At $198, Goldman Sachs Group (NYSE: GS) was recently carrying more weight than General Electric (NYSE: GE) with a price of $27.
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Both the Dow and S&P 500 indexes, and the cash flows from licensing their brands, are now owned by S&P Dow Jones Indexes. That’s a joint venture of majority owner McGraw Hill Financial, CME Group and News Corp. (Rupert Murdoch and the Saudis) owner of The Wall Street Journal.
Here’s the problem. The advent of passive index-linked investing, and the money it generates for the underlying index, has prompted S&P Dow Jones Indexes and McGraw Hill Financial to keep things looking, well, exciting—reapplying fresh lipstick to the pigs, if you will. To me, rather than being proxies for “the market,” these indexes are more promotional tools and investment products.
The esteemed Bureau of Economic Analysis (BEA) calculates that the industrial sector accounts for 37% of gross domestic product. Yet industrial stocks are less than 20% of the Dow. BEA reckons that financial firms are 18% of GDP, but they make up a full quarter of the Dow. Why is this? Simply put, financials are sexier than industrials. As recently as 1976, the Dow included far more industrials besides DuPont—Alcoa (NYSE: AA), Bethlehem Steel, Inco and U.S. Steel. Sure, the U.S. economy has shifted away from hard manufacturing. But by as much as the Dow makers think? Is Nike (NYSE: NKE), now a Dow stock, an adequate replacement for all that steel?
Here, some history is useful. The Dow, which dates back to 1896, was created by Wall Street Journal editor and Dow Jones & Co. cofounder Charles Dow as an easy way to express market trends. Initially, he added together the closing prices of 12 frequently traded stocks, divided that sum by 12 and printed the result. Over time, as stocks were added or existing ones split or otherwise changed their capital structure, the divisor was changed to allow for continuity. The Dow now contains 30 stocks. It is a price-weighted index, meaning stocks with higher prices have more influence in the index. At $198, Goldman Sachs Group (NYSE: GS) was recently carrying more weight than General Electric (NYSE: GE) with a price of $27.
...
Both the Dow and S&P 500 indexes, and the cash flows from licensing their brands, are now owned by S&P Dow Jones Indexes. That’s a joint venture of majority owner McGraw Hill Financial, CME Group and News Corp. (Rupert Murdoch and the Saudis) owner of The Wall Street Journal.
Here’s the problem. The advent of passive index-linked investing, and the money it generates for the underlying index, has prompted S&P Dow Jones Indexes and McGraw Hill Financial to keep things looking, well, exciting—reapplying fresh lipstick to the pigs, if you will. To me, rather than being proxies for “the market,” these indexes are more promotional tools and investment products.
The esteemed Bureau of Economic Analysis (BEA) calculates that the industrial sector accounts for 37% of gross domestic product. Yet industrial stocks are less than 20% of the Dow. BEA reckons that financial firms are 18% of GDP, but they make up a full quarter of the Dow. Why is this? Simply put, financials are sexier than industrials. As recently as 1976, the Dow included far more industrials besides DuPont—Alcoa (NYSE: AA), Bethlehem Steel, Inco and U.S. Steel. Sure, the U.S. economy has shifted away from hard manufacturing. But by as much as the Dow makers think? Is Nike (NYSE: NKE), now a Dow stock, an adequate replacement for all that steel?
http://www.forbes.com/sites/janetnovack/2015/05/08/built-for-marketing-why-the-sp-500-and-dow-are-misleading-investors/
So if these cherry picked, "pig-lipstick" stocks are taking a huge hit today, what does that say for the broader market? Nothing good. And they continue to lust for your Social Security money and less regulation.