How Relevant Is The Dow Jones As A Measure Of The Economy?
MARY LOUISE KELLY, HOST:
OK, so the Dow Jones tracks how 30 big companies are trading. These companies are all American, all blue-chip. This week's GE news got us wondering, why 30? And how relevant is the Dow these days as a measure of the health of the economy?
Well, Charles Geisst of Manhattan College is the author of "Wall Street: A History," and he joins me now. Professor Geisst, welcome.
CHARLES GEISST: Thank you very much.
KELLY: All right, so why 30? Why is that the magic number of companies to include?
GEISST: I think it just evolved that way over time. The original index, which was devised by Charles Dow in the late 19th century, included 12 stocks and the 12 largest companies in the country at the time, representing a sweep of the different kinds of industries which were considered the mature-growth companies.
KELLY: GE, it's worth noting, was in that original bunch. Is that right?
GEISST: It was one of the originals. And it's the only one which survived until just a couple days ago.
KELLY: Wow. Well, let me fast-forward us to the central question. How relevant is the Dow in 2018 as a measure of how the U.S. economy is doing?
GEISST: The Dow today is less relevant than the other two major indices which are reported, which is of course the Nasdaq index and, most importantly, the Standard & Poor's, the S&P 500 index.
KELLY: And why is it less relevant?
GEISST: Well, first of all, it's only very large companies which are waded into the index by virtue of their price. So in other words, they're all fairly pricey stocks. They're not necessarily representative of the overall market because, for instance, one notable exception is Google, which of course trades under the corporate name Alphabet, which is not a member of the Dow. And without them, it's sort of difficult to imagine that the index would be representative of the entire market.
KELLY: You know, another thing that strikes me is that the Dow is volatile compared to some of the other markets that one might look to as a measure of the U.S. economy. Is that a factor?
GEISST: It depends. I mean, certainly it's been more volatile most recently. But essentially the Dow has always been looked to as an indicator of the strength of the economy. And I think that may be the thing that's changing the most.
KELLY: How so?
GEISST: Well, when the Dow started marching into the 20,000s, I mean, most media outlets certainly hurled at the occasion, whereas Nasdaq - most people don't understand that Nasdaq has increased much more. But that's almost never talked about. It's occasionally mentioned.
KELLY: Yeah, and why is that? I mean, if you looked at anybody from - I don't know - the president of the United States to your average American, most of us could get you - could tell you ballpark where the Dow is. Relatively few could tell you about the other indices. So how do you square this argument that it's maybe less relevant, matters less than it did in days past with the fact that it's the one we all kind of follow?
GEISST: I think the only way to explain that is that it's the one we were all following for probably way too long. You know, it was the first measure of the market. It's been mentioned in the press, for instance, even before there was meaningful radio or certainly television, the measure of the market for well over a hundred years - probably 120 years the name has been recognized. Nasdaq, in those terms, is probably less than half that age. And the Standard & Poor's basically is nothing more than a statistical index. And most people wouldn't know what Standard & Poor's is other than some people might realize it's a rating agency. So I think it's a historical hangover from a period that we can't quite seem to sober up from quite yet.
KELLY: Do you think a hundred years from now we'll all still be talking about the Dow at whatever it's at, closing at 200,000 or wherever we are?
GEISST: (Laughter) It wouldn't surprise me, I mean, if we haven't been able shake it over the last 120 years. I guess maybe over the last 30 years, it's been less relevant than before. It's a good chance it'll go on for a bit.
KELLY: Professor Charles Geisst - he is author of "Wall Street: A History." Professor Geisst, thank you.
GEISST: My pleasure. Thank you.
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