Is the Dow Jones Average a good barometer of our economy?

Question

I often answer my own questions, so spare me what I already know! :)

No. The Dow Jones Average is 30 stocks (there's tens of thousands) chosen at random, and they then project the *average* that we hear on tv and in the papers.

S&P 500 is (duh) 500 stocks chosen at random, then a market-wide average is projected.

And then there's the Russel 2000. I'm sure you already know how many stocks they use for the average.

So you see, the Dow Jones means very little about our economy.

What's more accurate is how our currency does against the world currency.

We're at an all-time low USD against the Euro.

15 year low USD against the British Pound.


(I tutor for $25/hr!)

Answer 1

just in spite I will say yes

Answer 2

No the dow industrial average doesnt mean a whole lot.

But we are seeing a strong market. The S&P 500 for this month has only been higher one time ( august 2000 ) and only marginally.
The Nasdaq was only higher for about a 6 month period in 2000 ever also.

You are right on the USD vs the Euro ( Forex is more my specialty than stocks are ). Some of that was to be expected as more countries joined the EU but yes there is an problem there.

Answer 3

You are wrong on this one. It is not simply that the DJIA is 30 stocks, but 30 blue-chip stocks. The definition of a blue-chip is like a company that is the leader of an industry the nation could not do without. These 30 stocks usually change over the course of the years as the companies default or become less competitive and new companies lead the various industries. In good times when the companies have large portfolios of cash and marketable securities, their prices will be high driving the Dow to higher performances. Investors bid these prices up because they are expecting dividends. The signs of the market going up is a sign that investors are doing very well because of lower taxes and easy money.

In times of recession, the stock prices will plummet as investors fear higher taxes, more restrictions on lending and borrowing money, bankruptcies, etc. Lower prices in blue chip stocks drives the Dow down. As for the weakness in the dollar, this is because our industries are expanding and more U.S. goods and services are being traded overseas. This makes American goods cheaper and America profits. Japan's currency, the yen, has been very weak for a long time because American markets have been flooded with cheaper, more efficient Japanese products, and Japan has boomed in part because of a weaker yen.

As for you tutoring for $25/hour, I can see your students get what they pay for based on your apparent research and knowledge of the economy and the markets. . .

Answer 4

No, the Dow isn't a good proxy for the health of the economy. There are many other factors that are better gauges for the economy-- GDP, Inflation, Unemployment, Various price indices.

You probably should return some of that tutoring money.

The SP500 is not 500 random stocks-- they're chosen by committee to be representative of industries in the economy.

The DOW is not chosen at random either

Yep, our currency is tanking against most except for the Yen. You can thank our deficit and low interest rates for that. But even that isn't a good measure of the economy. That is more a reflection of monetary policy.

lastly, many companies who have had great quarters have benefited from FX gains (you got it, repatriation of foreign currency now worth more than the dollar)

Answer 5

The Dow Industrial only reflects the price of 30 stocks. All of them are very large American Companies that happen to do business internationally. Quite a number of them, although not all, are directly industrial in nature. Since they are so large, their performance is an indicator of the U.S. economy. Which, by the way is still BY FAR the worlds largest. Look up the Dow 30, I think you will have heard of all of the companies. P.S For those of you that are concerned about Chinese imports, a weak dollar helps promote exports.

Answer 6

Our economy is going down. The dow is going up only because the world markets are pushing it up. It has nothing to do with the realities of our economy. With the housing market bubble burst our economy is going to see a huge change in the next few months. We already see an over 860% increase in foreclosures in California alone. With the rapidly rising foreclosures, it's going to drive down housing prices which will create more foreclosures. this will drive down spending in all sectors and will have enormous consequences when it is coupled with the rising gas prices this summer. The dollar is plummeting as well which is not good for the small business owner. We are already seeing drops in the consumer confidence indices.

Answer 7

It depends. Right now, the Dow is being solely driven by corporate earnings reports and not much else.

Being at 13,058 doesn't say that we have a stellar economy. In fact, it reflects the "pressure" the Dow is expected to perform--given the high energy prices, the housing slump, the credit-card debt this nation has put itself under, and the sub-prime mortgage lender meldown. (To name a few.)

Bushbots will say that this reflects our low-unemployment and job growth--but they don't give anything to support their statements. Just recycled and regurgitated party rhetoric.

Answer 8

Yes, we are doing great, thanks to Bush's Tax Cuts.
As you should know, value of currency is a double-edged sword. There are benefits to it dropping, and also raising.
"IF" you work for a living, you have done better with raises than during the bubble Clinton years.
Your Pension is worth more.
Your IRA's are worth more.
Your 401k's are cranking.
(I HOPE YOU DON'T TUTOR ECONOMICS.)
This is Funny. Most people who complain about the economy, DON'T WORK!!!!!
That's the way it's always been.

Answer 9

How do you find the money to invest in the Dow after taxes on your Starbucks pay check?

Answer 10

Absolutely not. It is a good barometer of how much a company's stock is selling for and nothing more.

Repubs don't understand this simple statement. Limbaugh forbids it.

Answer 11

Who cares how the dollar is in relation to other markets?

If the stock market does well, America does well. I make money off the stock market, so can you.