Beyond the Dow
NEW YORK – As Eric Wolff tracks the investments he’s guiding, he generally doesn’t look to the stock market’s best-known indicator.
Instead of the Dow Jones industrial average, Wolff turns to broader indexes for a read on Wall Street.
Although many investors seem to fixate on each tick of Dow, it isn’t always the focus of investment professionals. The latest shake-up in the 30-stock index, which next week is set to swap in Bank of America Corp. and Chevron Corp. in favor of cigarette maker Altria Group Inc. and manufacturer Honeywell International Inc., is a reminder that while the Dow can be a handy snapshot of how big companies are expected to fare, investors concerned about their holdings must often ask more than “What did the Dow do today?”
Market professionals are more likely to track the Standard & Poor’s 500 index, in part because of its array of stocks, but also because many mutual funds either mirror or are compared against the S&P 500.
The Dow is “one of the things I consider but that doesn’t tell me how the day was,” Wolff said. “There are so many other factors that you can now look at to really give you a broader sense of how things moved.”
Wolff, who manages investments for himself and his investment firm, Flux Capital, tends to look first at the S&P 500 as a benchmark for large-capitalization stocks and the Russell 2000 index for smaller companies. As their names imply, the S&P follows 500 stocks and Russell reflects 2,000 issues.
To gauge how the market is faring, Wolff also considers factors such as how many stocks are advancing versus falling and how many are setting fresh highs compared with new lows.
While it’s not always professional investors’ first choice, the Dow does have its place as an indicator of how various parts of the economy might perform, said Steven Rhone, chief executive of the investment management company Wentworth, Hauser and Violich.
“We certainly benchmark most of our strategies off the S&P 500 but we also have to recognize there is a lot of history in the Dow,” he said. “The Dow has some importance to investor psyche, but I don’t think it should necessarily be used as a barometer for your investment decisions.”
Backers say the Dow’s 111-year history is part of its appeal as a Wall Street indicator. The upcoming changes to the Dow will be the first since April 2004 and serve as a reminder that indexes tend to change over time. Only one company has remained in the Dow since the index began with a dozen names in 1896: General Electric Co.
Next week’s changes were prompted by a makeover at Altria, which is better known by its former name, Philip Morris Cos. The maker of Marlboro cigarettes last year spun off its Kraft Foods Inc. division after earlier selling most of its Miller Brewing unit, and it will soon place its international tobacco operations into a separate company.