Which is Performing Better, the Dow or the S&P500 ?

Saturday, April 28, 2007 | 10:45 AM

The short answer is, depends on how you calculate it.

The results of looking at these two indices from various angles may surprise you.

The Dow is at an all time high, the S&P500 a few percent below. But it turns out that, as a whole the SPX is doing much better than the Dow.

The New York Times' Floyd Norris gives us the details:

"The Dow is normally calculated as a price-weighted index, meaning that stocks with the highest price for a share get the heaviest weighting. That is largely a historical accident, as it was the easiest way to do it in the 19th century, when the best calculator available was a person with a pencil.

The most common method of calculating indexes is by market capitalization, in which the companies with the largest market value count for the most. The chart [below] shows how the Dow would look if it were calculated in that manner, instead of the other.

While the Dow is up 18 percent from March 24, 2000, when the S.& P. peaked, it would have been down 8 percent had market capitalizations been used in the computation. That reflects the fact that some of the Dow stocks that did the worst, including General Electric, Microsoft, Intel and Pfizer, are large capitalization stocks that had relatively low share prices. That meant they had little impact on the Dow as normally calculated, but a large effect on the Dow as computed using capitalization figures."

What about equal weight computation? Hasn't that ETF (RSP) out performed the standard S&P500? Glad you asked -- yes, yes it has:

"The third method often used in index calculations is one of equal weighting, which assumes that one puts the same dollar value into each stock in the index.

The chart [below] shows that the S.& P. 500, calculated by market capitalization, is still 2 percent below where it was on March 24, 2000. But that reflects poor performances by some of the same very large companies that starred before 2000 and have not done as well since. Calculated by equal-weighting, the S.& P. 500 is 82 percent higher than it was in 2000."


The following charts show Dow and S&P500 performance since March 24 2000 (the day the S&P500 peaked):
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click or much larger graphic

Dow_perf_2

Graphic courtesy of NYTimes;
Sources: S&P, Bloomberg

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It would be interesting to see a price-weighted version of the SPX, or a an equal-weighted version of the Dow.

Norris adds that by the market capitalization version makes clear that "the Dow has underperformed, even if it is the Dow that is the index setting records these days."

Of course, all of these measures are domestic. Measured in euros, the price-weighted Dow is 15% lower than its 2000 peak . . .


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Source:
The Dow May Be at Its High, but Its Performance Is Still Lacking
FLOYD NORRIS
NYT,  April 28, 2007
http://www.nytimes.com/2007/04/28/business/28charts.html

Saturday, April 28, 2007 | 10:45 AM | Permalink | Comments (13) | TrackBack (0)
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It is most likely my own lack of sophistication that causes my consternation, but to me it seems that the reason for the sample should determine the configuration. What is it exactly that we are trying to measure?

The indices as constructed have always smacked a bit to me as hedonic adjustments with the weighting of some companies while dropping others from time to time and adding better performing equities - Dow ex-losers.

To actually know the comparison of today versus the year 2000, should not that comparison be based on the same equities and weighting that comprised the index at that time?

To my simple thinking, if what I want to know is a comparative measure of the how the market overall performs day-to-day, week-to-week, and so on, then the most telling numbers would be in the performance of the top (X) number of actively traded issues from each sector or industry with a bottom line dollar-per-share criteria to weed out the extremely low-end stocks. Each stock would be measured against its previous day's closing price so the end measurement would simply be an average percentage of change and total dollar volume either into or out of the most active issues.

That, to me, seems like more useful comparative information that the current indices.

Posted by: Winston Munn | Apr 28, 2007 12:51:35 PM

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