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There's a great piece on the New York Times' website, NYtimes.com, if you're from under a rock, titled "Why do we still care about the Dow?" by Adam Davidson of Planet Money fame.
The Dow Jones Industrial Average is a closely watched index but is comprised of only 30 giant companies.
Here's how the index is described on the Dow Jones Indexes website, DJaverages.com:
Roughly two-thirds of the DJIA's 30 component companies are manufacturers of industrial and consumer goods. The others represent industries as diverse as financial services, entertainment and information technology. Even so, the DJIA today serves the same purpose for which it was created – to provide a clear, straightforward view of the stock market and, by extension, the U.S. economy.
But, Davidson writes, "the Dow’s biggest flaw, perhaps, is that it doesn’t help us to make sense of an increasingly interconnected global economy -- one in which what’s good for G.M. isn’t always good for the country. G.E., I.B.M and Intel, for example, all make more than half their profits in other countries. And while this may be great for their shareholders, it means little for most Americans."
The Dow may be one of the worst indices to draw conclusions about the state of the economy, yet it's obsessively monitored and discussed. It's always baffled me, but I thought there must be something I was missing -- apparently not.
I'd link to Davidson's piece, but Bankrate policy forbids it; it's an enjoyable article with a hilarious "English-to-Dow Dictionary" at the end.
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