The Dow Jones Industrial Average had its longest consecutive losing streak since 1978, falling for 10 straight days from Dec. 5 to Dec. 19, 2024. SPDR S&P 500 ETF Trust NYSEARCA: SPYNasdaq 100 Index Tracked Invesco QQQ NASDAQ: QQQ, actually rose to a new record high and then fell 4% over the same period with seven red days. Evening news programs still refer to the Dow Jones Industry Average (DJIA) as the “market,” rather than the S&P 500 or Nasdaq 100.
Is it time to move beyond the Dow as a benchmark for the market?
If you only followed the S&P 500, you wouldn’t think the market is on such a historic losing streak. However, during this period, the DJIA fell every day, creating a gloomy atmosphere. Previously, the DJIA, SPY and QQQ indices moved synchronously, but the divergence is growing. This calls into question which benchmark index truly represents “the market.” When people say, “The market is down today,” should they really still be using the DJIA, which consists of just 30 companies, as a benchmark, or a broader sample of stocks like the S&P 500 index?
Is the DJIA too narrow to measure markets?
The DJIA is a price-weight index consisting of just 30 stocks. These 30 companies represent the largest and most reputable companies that serve as a barometer of the U.S. economy. A price-weighted index is an index in which the price of each component forms part of the index, since more expensive stocks will have more influence. The problem with a price-weighted index is that if any component undergoes a stock split, the value of the index will be severely affected. Critics argue that the DJIA is no longer an accurate measure of the performance of the financial market or the U.S. economy.
Founded in 1896, the original DJIA consisted of 12 stocks, which gradually expanded to 20 stocks in 1916 and finally to 30 companies in 1928. Since then, it has remained at 30 shares. None of the original 12 stocks remain in the index today. Instead of expanding the index, the committee regularly replaces underperforming stocks with new stocks. Proctor and Gamble Company. New York Stock Exchange:PG is the oldest component of the DJIA index, joining it in 1932. The argument is that a larger sample size will provide a more accurate picture of market performance.
Is the S&P 500 the true benchmark for US markets?
The S&P 500 Index was created by Standard and Poor’s in 1957 to track the 500 largest publicly traded companies in the United States. The goal was to gain a better understanding of the US economy and US stock markets through a more comprehensive list of companies classified into 11 sectors and 24 industries. The S&P 500 Index is widely believed to be the most accurate representation and primary benchmark index, which is why S&P 500 futures are the most traded index futures contract in the world.
It is also the benchmark against which the performance of investors and fund managers is compared (for example, funds often compare their performance to the S&P 500 index). The S&P 500 is a market-cap-weighted index that weights its constituents by market capitalization (rather than price, like the DJIA). The problem with a market capitalization index is that the largest companies have the greatest influence on the index’s value. The Magnificent Seven stocks control nearly 30% of the overall S&P 500 index.
While the larger number of stocks in the DJIA is likely to be a more accurate indicator of U.S. markets, the S&P 500 should be used when it comes to the most accurate barometer of the U.S. economy and U.S. stock markets.
To ensure a level playing field, investors can use the S&P 500 Equal Weight Index presented by Invesco S&P 500 Equal Weight ETF NYSEARCA:RSP. The performance difference is obvious. SPY is up 24.4% versus RSP, up 12% year to date (YTD) as of December 20, 2024.
Before you consider the SPDR S&P 500 ETF Trust, you should hear this.
MarketBeat tracks Wall Street’s top-rated and best-performing analysts daily and the stocks they recommend to their clients. MarketBeat identified five stocks that top analysts are quietly whispering to their clients to buy now, before the broader market catches on… and the SPDR S&P 500 ETF Trust wasn’t on the list.
While the SPDR S&P 500 ETF Trust currently has a Hold rating among analysts, the top-rated analysts think these five stocks are Outperform Buys.
View five stocks here
Click the link below and we’ll send you MarketBeat’s list of seven of the best retirement stocks and why they should be in your portfolio.
Get this free report