Dow 14,000 Is Back ... But Does That Really Mean Anything?

Market wavering
Market wavering

On Wednesday, the Dow Jones Industrial Average (^DJI) closed at 14,075, its highest close in the past five years -- its fifth-highest closing price ever, and within 90 points of its all-time high: 14,164, reached on Oct. 9, 2007.

So ... hurray?

There's no denying the psychological satisfaction of being able to point to a number and say: "Hey! Look! We crossed this line!" But this doesn't change the fact that the line is, in this case at least, really pretty arbitrary. Really, what does Dow 14,000 even mean?

Does it mean America is now worth 14,000 ... "Dows?" (No.)

Does it have something to do with the share price of Dow Chemical (DOW)? (Also no. As it turns out, Dow Chemical isn't even a component stock on the index.)

Does it mean something, somewhere, is now worth $14,000? (Well, the answer to that is probably yes -- but it's still got nothing to do with Dow 14,000.)

Actually, what "Dow 14,000" really means goes something like this:

A Brief Primer on the Dow

At its heart, the Dow Jones Industrial Average is a list of 30 big (not necessarily the biggest) American companies. The complete list is put together by the folks at The Wall Street Journal, and it varies over time as some stocks get bumped off the list and others get added. Kraft (KRFT), for example, recently exited, and UnitedHealth Group (UNH) took its place.

As of today, the list looks like this:

  • Alcoa

  • American Express

  • Boeing

  • Bank of America

  • Caterpillar

  • Cisco Systems

  • Chevron

  • DuPont

  • Disney

  • Exxon Mobil

  • General Electric

  • Home Depot

  • Hewlett-Packard

  • IBM

  • Intel

  • Johnson & Johnson

  • Coca-Cola

  • JPMorgan Chase

  • McDonald's

  • 3M

  • Merck

  • Microsoft

  • Pfizer

  • Procter & Gamble

  • AT&T

  • Travelers

  • UnitedHealth Group

  • United Technologies

  • Verizon

  • Walmart

Summing It Up

Of course, if you add up the stock prices of all 30 of these companies, what you get (as of this writing) is a grand total of $1,832.84. It's a big number. A nice chunk of change. But as you can clearly see, it's nowhere near $14,075.

So how do we get from $1,832.84 to 14,075 somethings? Easy. Every time one of the stocks on the list up above rises in price by $1, "the Dow" gets adjusted up by 7.68 "points." Every time another stock goes down by $1, the Dow loses 7.68 points.

Add up all the changes in all the stocks on the Dow at any given moment, multiple the result by 7.68, and you get the day's change in the Dow. Tally up all the prices of all the stocks on the list at the end of the day, multiply by 7.68, and voila -- now you have the value of the Dow. For whatever it's worth. (In Wednesday's case, it was worth 14,075 somethings).

What Does It Mean to You?

So now that you know what the Dow is, what does it mean? What are you supposed to do with the information?

Some people will tell you that because the Dow hit a new five-year high, this is proof the economy's doing great, the stock market is even better, and now's a great time to buy stocks. Which, of course, is patently false.

After all, the last time the Dow was about as high as it is today, it began falling, and took five years to get back to where it was (or where it is).

We can see today that this was not a propitious sign back then, so there's really no reason to believe that Dow 14,000 means anything more profound today.

Other "experts" have other theories. For example, Marketwatch published a "Dow Theory" column on Wednesday arguing that because the Dow Jones Transportation Index (DJT) is hitting a high note, and outperforming the Industrials, this too is a bullish sign.

It's not. On the one hand, the Transports have outperformed the Industrials all year so far. So arguing that now is the time to buy begs the question: Wouldn't it have been just as good to buy stocks back in January? Indeed, since stocks have gone up, wouldn't it have been better to buy back then, than now?

Fact is, if you look at a chart of the two indices' performance over the past five years, you can find any number of examples when "Dow Theory" was just plain wrong. March 2012. July 2011. April 2010. And of course, September 2008.

When all's said and done, Dow 14,000 is just a number. You can read into this number anything you like. You can even choose to buy stocks because you like the number. But the number itself doesn't guarantee you any sort of success whatsoever.

Motley Fool contributor Rich Smith holds no position in any company mentioned.The Motley Fool owns shares of McDonald's, Cisco Systems, International Business Machines, Walt Disney, JP Morgan Chase, Bank of America, Intel, and Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of Chevron, American Express, 3M, Cisco Systems, Home Depot, Coca-Cola, Microsoft, UnitedHealth Group, Walt Disney, McDonald's, Johnson & Johnson, Procter & Gamble, and Intel.