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The Dow Jones surpassed 40,000 points for the first time. The number is big, but it means little for your 401(k)
NEW YORK (AP) — The Dow Jones Industrial Average surpassed 40,000 for the first time, the latest increase in a surprisingly good year for Wall Street.
But just as the New Year represents an arbitrary point in time in the Earth’s revolution around the Sun, such milestones for the Dow Jones don’t mean much on their own.
For one thing, with just 30 companies, the Dow represents a small slice of Corporate America. On the other hand, almost no one’s 401(k) accounts see their performance as dependent on the Dow, which has become yet another relic used for historical comparisons.
Here’s a look at what the Dow is, how it got here, and how its use among investors is on the decline:
WHAT IS DOW?
It is a measure of 30 established and well-known companies. These stocks are sometimes known as “blue chips,” which are supposed to be on the more stable and safe side of Wall Street.
WHAT’S IN THE DOW?
Not just industrial companies like Caterpillar and Honeywell, despite the name.
The list has changed many times since the Dow began in 1896, as the U.S. economy transformed. Out, for example, was Standard Rope & Twine, and recently large technology companies have emerged.
Apple, Intel and Microsoft are some of the newer economy names currently in the Dow. The financial sector also has a healthy representation with American Express, Goldman Sachs, JPMorgan Chase and Travelers. The same is true in healthcare with Amgen, Johnson & Johnson, Merck and UnitedHealth Group.
WHAT IS ALL THE HUBBUB NOW?
The Dow Jones just surpassed its most recent threshold of 10,000 points, briefly reaching 40,000 points in midday trading on Thursday. It took around three and a half years to reach 30,000 points, which it surpassed for the first time in November 2020.
It kept rising despite the worst inflation in decades, painfully high interest rates aimed at keeping inflation in check and concerns that high rates would make a recession inevitable for the U.S. economy.
Companies are now posting their best profit growth in nearly two years, and the economy has managed to avoid a recession, at least so far.
IS THE DOW WALL STREET’S MAIN MEASUREMENT?
No. The Dow only represents a small slice of the economy. Professional investors tend to look at broader measures of the market, such as the S&P 500 index, which contains nearly 17 times the number of companies.
More than $11.2 trillion in investments were compared to the S&P 500 at the end of 2019, according to estimates from the S&P Dow Jones Indexes. That’s 350 times more than the $32 billion compared to the Dow Jones Industrial Average.
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Investors’ 401(k) accounts are much more likely to include an S&P 500 index fund than anything tied to the Dow. The S&P 500 surpassed its own milestone on Wednesday, surpassing 5,300 points for the first time.
This is what most investors care about. Well, 100-point milestones are just as important for the S&P 500 as they are for others, but the fact that the S&P 500 is higher than ever is very important.
HOW DIFFERENT ARE THE DOW AND THE S&P 500?
Their performances have historically been relatively close to each other, but the S&P 500 has been better recently. Its 29.3% increase over the past 12 months easily surpasses the Dow’s 21.1% gain.
This is in part because the S&P 500 places more emphasis on Big Tech stocks, which accounted for most of the S&P 500’s gains last year. Hopes for a Federal Reserve interest rate cut and the frenzy surrounding artificial intelligence technology have driven them to dizzying heights.
The Dow does not reflect any of the movements of prominent stocks like Alphabet, Meta Platforms or Nvidia.
AND THAT?
No, the Dow and S&P 500 also take different approaches to measuring how an index should move.
The Dow gives more weight to higher-priced stocks. This means that the stocks that add or subtract the most dollars to the stock price are the ones that push and pull it the most, like UnitedHealth Group and its $523 stock price. A 1% move for these stocks, which costs about of $5, is radically more difficult than a 1% move to Walmart, which costs about 63 cents.
The S&P 500, in turn, gives more weight to stocks depending on their overall size. This means that a 1% move for Walmart carries more weight than a 1% move for UnitedHealth Group because Walmart is a slightly larger company by total market cap.
SO WHY WORRY ABOUT THE DOW?
Because it is so old, it has a longer history than other measures on the market.
For a while, a triple-digit move for the Dow also offered a shorthand and easy way to show that the stock market was having a big day. Now, however, it means much less. A 100-point swing for the Dow means a move of less than 0.3%.