Friday, March 8, 2013

High? What High?

Said a really curmudgeonly guy
On the Dow Jones Industrial high:
"It's still quite a ways
From the Internet craze,
When adjusted for core CPI."

All the fuss over the record-breaking Dow Jones Industrial Average figures this week has brought out the wet blankets who like to spoil the fun by adjusting things for inflation. "The Dow Jones' new high is fake," says the Washington Post's Ezra Klein, who points out that, to equal the inflation-adjusted record set at the height of the Dot-Com bubble in 2000, the Dow would have to surpass 15,731.54 - 9.8% higher than Thursday's close of 14,329.49.

But why stop at an inflationary critique? Other commentators have taken down the DJIA itself as a "lousy", "ridiculous" way to measure stock market performance. This is because, as even Charles Dow himself realized back in 1896, his eponymous index simply adds up the prices of the companies that it comprises, with no further weighting or adjustment. Thus, two of America's biggest companies - Apple ($AAPL) and Google ($GOOG) - cannot be used in the index because their very high per-share prices ($430.58 and $832.60) would throw off the average. Instead of a price-weighted index such as the Dow, it's more useful to measure the market with an index weighted by market capitalization (i.e., the total value of each company), such as the S&P 500. And while you're at it, don't forget to do so in constant dollars.

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