Broader market still climbing out of post-2000 hole

David Milstead, Rocky Mountain News

Friday, October 20, 2006

The Dow Jones industrial average is prompting quite a few headlines these days. But it doesn't mean your 401(k) is hitting record levels.

The Dow is one of the oldest and most-watched measures of the stock market. Hence the widespread hoo-ha over its record close Oct. 3 and its close above the benchmark 12,000-point level Thursday.

It is also a basket of just 30 stocks, chosen by the editors of The Wall Street Journal, which only recently began to reflect the broadening of the U.S. economy.

Now, to be fair, they are big, blue-chip stocks. The companies in the 110-year-old index accounted for nearly one-quarter of the value of the 5,000 biggest U.S. companies as of last December.

Because of its stature in the prosperous years after World War II, "The industrial average became the indicator to cite if you were citing only one," Dow Jones says on a Web site promoting its indexes.

Yet virtually no investor has a portfolio that tracks the Dow exactly.

The company says only that the Dow "reliably indicates the market's basic trend."

If anything, it's the Standard & Poor's 500 - so named for its 500 stocks - that mirrors the performance of those who invest broadly. Many index funds use the S&P 500, not the Dow, to capture "the stock market."

But because the Dow has failed to reflect the world's new technology-based economy, it has returned to its 2000 peak faster than the S&P 500 and, particularly, the Nasdaq composite.

The Nasdaq, the tech-heaviest of any of the broad indexes, closed at 2,340.94 on Thursday, still less than half its 5,000-plus peak in 2000.

Investors who grabbed the silicon ring in the late 1990s know this all too well. An investor who put $10,000 in the Nasdaq Composite on March 31, 2000 - days after the peak - has just $5,119 today.

How about a relatively blended portfolio of stocks? Dividing that $10,000 among the Nasdaq, the S&P 500 and the Dow on March 31, 2000, would have yielded $8,413 at the close of Thursday's trading.

Invest $10,000 in the Dow? $10,998 today - if there actually was anyone choosing to invest in just those 30 stocks.

More likely, it was an index with more historic, than practical, significance - as it is today.

Group of 30

• The Dow Jones industrial average, introduced in 1896 by Charles H. Dow, is the oldest stock price measure in continuous use. Today, it's the most widely followed measurement of the stock market. The average is composed of 30 stocks that represent leading companies in major industries and represent about 20 percent of the market value of all U.S. stocks. These stocks, widely held by both individual and institutional investors, are all blue-chip companies. The 30 companies that make up the Dow:

3M

Alcoa Inc.

Altria Group Inc

AIG

American Express

AT&T Inc.

Boeing Co.

Caterpillar Inc.

Citigroup Inc.

Coca-Cola Co.

Disney (Walt) Co.

Du Pont

Exxon Mobil Corp

General Electric

General Motors

Hewlett-Packard

Home Depot Inc

Honeywell Intl.

IBM

Intel Corp.

Johnson & Johnson

JPMorgan Chase

McDonald's Corp.

Merck & Co.

Microsoft Corp.

Pfizer Inc.

Procter & Gamble

United Tech Corp.

Verizon Communications

Wal-Mart Stores

David Milstead is finance editor of the Rocky Mountain News. He can be reached at milstead@RockyMountainNews.com or 303-954-2648.