The 13,000 mark is an illusory milestone for the Dow
The Dow Jones industrial average rose above 13,000 in the past week, well above the highest point it reached in 2000 before the technology stock bubble burst and the country went into a recession in 2001. At the same time, the Standard Poors 500, which is the Dows principal competition for most prominent index in the United States, has not yet made it back to its lofty 2000 peak.
But does that mean the stocks in the Dow have done better than those in the SP index since the market peaked in 2000? Actually not. As can be seen in the charts, only half of the stocks in the Dow are higher than they were back then, while the number of higher stocks in the SP is three times as high as the number of stocks that have fallen.
At issue is how indexes are calculated. There are at least three ways that major indexes are calculated, and the choice of one or the other can make a big difference.
The Dow is normally calculated as a price-weighted index, meaning that stocks with the highest price per share get the heaviest weighting.
The most common method of calculating indexes is by market capitalization, in which the companies with the largest market value count for the most. The chart shows how the Dow would look if it were calculated in that manner, instead of the other.
While the Dow is up 18 percent from March 24, 2000, when the SP peaked, through Thursday, it would have been down 8 percent had market capitalizations been used in the computation. That reflects the fact that some of the Dow stocks that did the worst, including General Electric, Microsoft, Intel and Pfizer, are large-capitalization stocks that had relatively low per-share prices. That meant they had little impact on the Dow as normally calculated, but a large effect on the Dow as computed using capitalization figures.
The third method often used in index calculations is one of equal weighting, which assumes that one puts the same dollar value into each stock in the index.
The chart shows that the SP 500, calculated by market capitalization, ended Thursday 2 percent below where it was on March 24, 2000. But that reflects poor performances by some of the same very large companies that starred before 2000 and have not done as well since. Calculated by equal-weighting, the SP 500 ended Thursday 82 percent higher than it was in 2000. In every year from 1994 to 1999, the equal-weighted index did worse than the normal SP. In every year since, it has done better.
There is no price-weighted version of the SP available, nor is there an equal-weighted version of the Dow. But using the market capitalization versions, it is clear the Dow has underperformed, even if it is the Dow that is the index setting records these days.
Investors with an international perspective may note that the U.S. dollar is not what it used to be. In 2000, a euro was worth less than a dollar. Now a euro is worth more than $1.35. Measured in euros, the price-weighted Dow is still 15 percent lower than it was in March 2000.
