The Dow just crossed 40,000 for the first time. The number is big but means little for your 401(k)
NEW YORK — The Dow Jones Industrial Average just broke the 40,000 mark for the first time, the latest figure in what has been a surprisingly good year for Wall Street.
But just as New Year represents an arbitrary point in the Earth’s revolution around the sun, such milestones inherently don’t mean much to the Dow Jones.
First, the Dow Jones, with only thirty companies, represents a small slice of corporate America. On the other hand, almost no one in their 401(k) account sees their performance hinging on the Dow Jones, which has become more of a relic used for historical comparisons.
Here’s a look at what the Dow Jones is, how it got here, and how its use among investors is declining:
WHAT IS THE DOW?
It is a benchmark for 30 established, well-known companies. These stocks are also known as ‘blue chips’, which are supposed to be on the more stable and safer side of Wall Street.
WHAT’S IN THE DOW?
Not just industrial companies like Caterpillar and Honeywell, despite the name.
The selection has changed many times since the Dow Jones’ inception in 1896 as the U.S. economy has transformed. Out, for example, was Standard Rope & Twine, and lately there have been big tech companies.
Apple, Intel and Microsoft are some of the newer names in the economy currently in the Dow Jones. The financial sector also has healthy representation with American Express, Goldman Sachs, JPMorgan Chase and Travelers. That includes healthcare with Amgen, Johnson & Johnson, Merck and UnitedHealth Group.
WHAT IS ALL HUBBUB NOW?
The Dow Jones just briefly crossed the 10,000 point mark to top 40,000 during afternoon trading on Thursday. It took about three and a half years to make the jump from 30,000 points, which was first exceeded in November 2020.
Most of all, interest rates continue to rise despite the worst inflation in decades, painfully high interest rates intended to control inflation, and concerns that high interest rates would make a recession inevitable for the U.S. economy.
Companies are now in the midst of reporting their best earnings growth in almost two years, and the economy has managed to avoid a recession, at least so far.
IS THE DOW WALL STREET’S MOST IMPORTANT MEASURE?
No. The Dow Jones represents only a small part of the economy. Professional investors tend to look at broader market measures, such as the S&P 500 index, which contains almost 17 times as many companies.
More than $11.2 trillion in investments compared to the S&P500 at the end of 2019, according to S estimates&P Dow Jones Indices. That’s 350 times more than the $32 billion compared to the Dow Jones Industrial Average.
It is much more likely that investors’ 401(k) accounts have an S&P 500 index fund than anything tied to the Dow Jones. The S&The P 500 exceeded its own milestone on Wednesday and reached 5,300 points for the first time.
That’s what more investors care about. Milestones of 100 points are important for the S&P 500 just as little as others, but the fact that the S&P500 is higher than ever, it makes a big difference.
HOW DIFFERENT ARE THE DOW AND THE S&P500?
Their appearances are relatively closely linked historically, but the S&P500 has been better lately. The increase of 29.3% in the past twelve months easily exceeds the gain of 21.1% for the Dow Jones.
That’s partly because the S&The P 500 puts more emphasis on Big Tech stocks, which accounted for most of the S&Last year’s P500 profit. Hopes for a rate cut by the Federal Reserve and the frenzy surrounding artificial intelligence technology have driven this to dizzying heights.
The Dow Jones does not reflect any movements of major stocks such as Alphabet, Meta Platforms or Nvidia.
IS THAT IT?
No, the Dow and S&P 500 also takes different approaches to measuring how an index should move.
The Dow gives more weight to stocks with a higher price tag. That means stocks that add or subtract more dollars to their stock price push and pull it the most, like UnitedHealth Group and its $523 stock price. A 1% move for that stock, which costs about $5, delivers a radically harder clap then a 1% move for Walmart, which amounts to about 63 cents.
The S&P500, meanwhile, gives more weight to stocks depending on their overall size. That means a 1% move for Walmart outweighs a 1% move for UnitedHealth Group, because Walmart is a slightly larger company in terms of total market value.
WHY CARE ABOUT THE DOW?
Because it is so old, it has a longer track record than other market instruments.
For a while, a triple-digit move for the Dow Jones also provided an 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 Jones means a move of less than 0.3%.