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Dow not always best barometer

Financial experts contend consumers put too much stock in this economic measure.

By JEFF HARRINGTON, Times Staff Writer
© St. Petersburg Times
published July 28, 2002


Dow plummets 390 points: Sell! Sell! Sell!

Dow surges 488 points: Climb in off the ledge.

When a typical American with a wallet full of credit cards and a 401(k) wants to get a handle on the economy, one barometer seems to be in a class by itself.

The Consumer Price Index? Unemployment rates? Perhaps the latest figures for durable goods sold? Nah.

Somehow, it's always the Dow. The century-old Dow Jones Industrial Average, a roster of stocks picked by a couple of journalists, has ballooned into a measure for the masses, not only of the stock market but of the economy as a whole.

To economists, elevating the Dow to such importance doesn't make sense. To money managers, it's not only illogical but headache-inducing.

Ask Tampa money manager Dee Howland of Howland and Associates, who has been fielding calls from worrisome clients during the Dow's recent decline. (It will open Monday at 8,264.39, slightly above the Sept. 21 level of 8,235.81, the Dow's closing low after the terrorist attacks.)

"I tell them if they're getting stressed out because of the Dow, it's unfortunate but their portfolio is not like the Dow," she said. "The last several weeks, especially, the Dow hasn't been acting like the rest of the market so it's misleading."

The way money is being made -- and lately lost -- makes the Dow resemble a Las Vegas craps table instead of what it's supposed to be: a tally of stock prices for 30 of the largest and allegedly most stable public companies in the country.

Howland blames the heady days of the bull market, when consumers got used to flipping on CNBC after work and equated the market with the Dow's ever-rising close. "TV shows in particular have put such an undue emphasis on the Dow," she said.

Scott Brown, senior economist with Raymond James Financial of St. Petersburg, scoffs at using the Dow for insights into the economy. "The best indicators are probably the slope of the yield curve, the difference between long-term and short-term rates and the money supply," he said.

Try putting all that in the corner of a TV screen or in the shorthand of a newspaper headline. A stark, singular number like the Dow is a lot easier to understand than the nuances of a yield curve (which, by the way, is a tool used to compare interest rates on short- and long-term securities).

The other problem is that the stock market itself isn't what it used to be. Stock prices are supposed to reflect the state of corporate earnings and the economy in general.

Lately, it's a case of "the tail wagging the dog," Brown said. "In some sense, the market has been driving the economy the last few years, both on the way up and the way down."

The stock market seems to reflect more fear than economic realities these days. Corporate profits are gradually improving while stocks have been sagging. "The market is much worse off than the economy is," Wachovia securities economist Mark Vitner said.

Vitner said the most recent studies of consumer confidence show Americans are starting to wise up to that disconnect and tune out the market's erratic performance.

The Dow's keepers, Dow Jones & Co. (which also publishes the Wall Street Journal), say they never asked to be an economic bellwether. "It's not our intention to create an index to shape consumer confidence," Dow spokeswoman Sybille Reitz said. "We simply measure the (stock) market... It's a very good measurement tool of the market."

Yet even as a stock market gauge, some argue the Dow falls short. With a combined value of about $2.5-trillion, its 30 stocks represent less than a fourth of the U.S. market.

The Wilshire 5000 stock index represents many more companies, as does the Russell 3000. Then there's the Standard & Poor's index, a compilation of 500 stocks that's preferred by economists as a "leading economic indicator." Many Americans have their pension money invested in mutual funds that track one of those broader measures.

The Dow traditionally has been more of a lagging indicator than a leading one. That's because its portfolio is filled with household names like Procter & Gamble, the kind of blue chip stocks that investors tend to hold on to when the market first runs into trouble.

It's not surprising there are so many misconceptions about the Dow Jones Industrial Average. Even its name is a misnomer.

It's not really "industrial" anymore, not with stocks such as Walt Disney and McDonald's included.

And it's not really an "average" either. The size of the Dow -- say 10,000 (to really be an optimist) -- is derived from the current stock prices of the Big 30 companies. Unlike other stock indexes, it doesn't reflect a company's market capitalization (its stock price times the number of outstanding shares).

Despite some criticism, there's no plan to change the formula. To do so would throw off a century of statistics, irking market prognosticators who weave the Dow's historical performance into their models with the enthusiasm of kids following baseball batting stats.

So how did the Dow grow to have such a powerful, almost mythical, effect on the American consumer's psyche?

It all started in 1882 when Charles Dow, Edward Jones and Charles Bergstresser (he was the original "& Co.") joined together to track the stock market. In 1896, Dow picked 12 companies viewed as representative of corporate America and, in a novel idea at the time, began compiling an index of their trading prices. The original list was dominated by household names (at the time) such as American Sugar and U.S. Rubber. General Electric is the only one of the original dozen still there.

Today, just two guys -- Wall Street Journal managing editor Paul Steiger and Dow Jones Indexes editor John Prestbo -- have the final say to add or remove stocks from the Big 30. The last time they fiddled with the list was in 1999, during the tech boom. It was in with new blue-chip stocks such as Microsoft, Intel, Home Depot and SBC Communications; out with old economy has-beens such as Chevron and Union Carbide.

It was an attempt to diversify the Dow beyond its coalition of New York Stock Exchange companies to incorporate companies listed on Nasdaq in general and the increasingly important technology industry in particular.

Reitz, the Dow spokeswoman, maintains the shuffling paid off, making America's favorite index a better reflection of America's leading public companies.

To prove her point, Reitz cites a recent analysis that includes data through June. It concludes that over the past 20 years, the Dow has been a remarkably accurate indicator of the performance of the overall market.

Of course, based on the Dow's recent performance, no one is saying that's a good thing.

-- Jeff Harrington can be reached at harrington@sptimes.com or (813) 226-3407.

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