On Air Now

Listen

Listen Live Now » 106.1 FM Lansing, Michigan

Weather

Current Conditions(Holt,MI 48842)

More Weather »
65° Feels Like: 65°
Wind: NNW 10 mph Past 24 hrs - Precip: 0”
Current Radar for Zip

Today

Thunderstorms 63°

Tonight

Partly Cloudy 43°

Tomorrow

Sunny 63°

Analysis: The Dow - Old, yes, but hardly irrelevant in march to record

The Dow Jones financial electronic ticker is seen at Times Square in New York July 17, 2012. REUTERS/Shannon Stapleton
The Dow Jones financial electronic ticker is seen at Times Square in New York July 17, 2012. REUTERS/Shannon Stapleton

By Leah Schnurr

NEW YORK (Reuters) - Market professionals sometimes deride it as a relic, deeply flawed in its structure, useful mostly as the man-on-the-street's window on the stock market.

But the old man of Wall Street, the Dow Jones industrial average <.DJI>, has had enough kick left in its 117-year-old legs to vault to an all-time high before its major rivals. Not only that, but it has done it with arguably more tortoises than hares in its mix.

The index hit a high of 14,286.37 on Tuesday, surpassing the previous high set in 2007.

The Dow, created in 1896 with the shares of 12 companies, comprises 30 stocks. Most are household names: General Electric , Coca-Cola , Boeing , Procter & Gamble and IBM .

When it was originally conceived, the index was made up of the more important companies of the time, mainly railroads and raw materials producers. As time passed, the average shifted to reflect the changing economic make-up and now includes only a handful of companies that would be considered "industrial."

Investment pros regard a clutch of rival market measures - the S&P 500 <.INX>, the Russell averages and the MSCI Indexes - as better barometers of the overall market because they represent a broader swath of companies. But the Dow remains the common man's index, its compact size and infrequent changes making it easy for the average investor to follow.

The fact that the Dow is so widely followed and recognized by Main Street is part of what makes the index important.

"For everyday investors, the Dow is probably more important than the S&P 500," said Michael Sheldon, chief market strategist at RDM Financial, Westport, Connecticut.

"The idea that the Dow Jones industrial index is an industrial average reflecting the manufacturing sector in the United States went away decades ago."

So what has propelled it to uncharted territory when broader benchmarks are still retracing losses from the financial crisis? In a nutshell: dividends and value.

First, most of the stocks in the average pay dividends, giving it a slightly higher dividend yield, currently 2.61 percent, than the Standard & Poor's 500 Index' yield of 2.52 percent. The Dow's dividend yield has averaged a quarter percentage point above the S&P 500's yield since the U.S. stock market's post-crisis low in March 2009, attracting investors who favor income as well as stock price appreciation.

From the previous U.S. market peak close on October 9, 2007, the Dow's dividend superiority has contributed to a positive total return, including reinvested dividends, of 17.4 percent versus just 9.9 percent for the S&P.

Also, during the bear market from October 2007 to March 2009, the Dow fell less than other market measures. For instance, it lost 53.8 percent of its value, compared with 56.8 percent for the S&P 500.

The heavy focus on value stocks in the Dow has helped it during the recent market advance that began in November. The blue-chip index sports a price-to-earnings ratio of 14.5 times trailing 12-month earnings while the S&P is about 8 percent pricier, with a comparable multiple of 15.7.

That value bias has provided a tailwind for the Dow in recent months, with the index up 8.9 percent so far this year. A broader measure of the market, the Russell 3000 value index <.RAV> is up nearly 9.4 percent for the year, compared with a gain of about 7.3 percent for Russell's growth index <.RAG>, and value has outperformed significantly since September.

"Historically, the Dow tends to perform better in difficult markets and the S&P tends to perform better in stronger markets," said Jamie Farmer, managing director for S&P Dow Jones Indices, in New York.

"If you see the tendency of the Dow right now to outperform slightly, that may be reflection of the fact that people are more drawn to those mega-cap stocks."

The Dow has another factor working in its favor over the last few months: it does not include Apple , which has tumbled from its record high hit last September. The stock's huge influence on the S&P 500 has been a significant drag, and had Apple merely remained stagnant after hitting its closing record of $702.10, the S&P would be about 10 points from its record.

Then again, if Apple had been in the price-weighted Dow over the last several years, it would have overwhelmed the index with its big gains. Apple has not been included in the Dow due to the fact that its still expensive $425 price would give it an undue influence on the index, said Farmer.

While they might not be the trendiest stocks on Wall Street, companies in the index are seen as having progressed past their heady high growth days and into a more mature stage of life, ideally offering steady returns.

That's not to say the index does not have detractors. The Dow indexes have traditionally favored stocks that reflect the economic makeup of the economy, so underperformers like American International Group can stay in the index, dragging the average lower. One of the more recent culprits has been Hewlett-Packard , which ironically is the biggest gainer in the Dow this year, up more than 40 percent.

One or two stocks can play an outsized role in the average's moves because of their price - International Business Machines , for instance, at $200 a share, more than doubles the price of every other member of the average except for two. The S&P 500 and most other indexes, in contrast, are market-cap weighted.

Also, very few stocks in the index can be called "growth" stocks - not even tech names like Cisco and Microsoft , which were added after their highest-growth years.

"Obviously it's only 30 stocks, so it's not the broader indicator like the S&P 500," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.

"You can have the Dow go up, and rest of the market just flag. It doesn't give you an accurate picture of what the whole market in general is really doing. But it's not something you totally discard."

(Additional reporting by Caroline Valetkevitch; Editing by Dan Grebler)

Comments