At 116 years old, the Dow Jones Industrial Average (^DJI) is still considered to be Main Street's benchmark for the U.S. stock market. The price-weighted index is made up of only 30 stocks, many of which are no longer considered traditional industrials. Every so often, the argument to change up Dow gains steam and questions of its relevancy arise.
Nick Colas, chief market strategist at ConvergEx, tells Breakout the DJIA "is viable because it's the longest track record of the U.S. stock market we have…it gives us a really interesting and useful long-term track record of U.S. stock returns."
While Wall Streeters typically use the S&P 500 (^GSPC) as the benchmark, Colas argues the DJIA is still "the most widely watched index of stock market performance in the U.S. and if you ask anyone how'd the market do out there in America, they're probably gonna tell you how the Dow did that day."
Clearly the index is still powerful, but is it truly representative of the U.S. market? Recently there have been calls to add tech giant Apple (AAPL) and dump aluminum maker Alcoa (AA).
"You would have to add Apple in at a weighting that would be…three times as much as IBM (IBM) and six times as much as the next nearest name in the Dow," says Colas. "It would be 25-30% of the Dow Jones Industrial Average. It's just too big a weighting."
Colas notes that Apple (and other big tech companies) have a certain fondness for high share price -- Apple is one of just three companies on the S&P 500 with a share price over $600 -- and as long as that continues, don't expect to see the stock added to the Dow.
At the other end of the spectrum stands Alcoa . Colas notes that the company is a good industrial proxy, specifically showing demand for aluminum across the automotive and home appliance sectors.
That should be enough to keep Alcoa in place on the Dow but for Colas it brings up the larger issue of stability within the index.
"In general the Dow committee tries very hard to maintain some long-term relevance and continuity and they know that shifting names around a lot doesn't really do that so they try to keep it fairly static."
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