Does the Dow Really Represent the American Economy?
Every investor knows that the Dow Jones Industrial Average is designed to represent America's economy by showcasing its most prominent public companies across a wide range of industries. As the American economy has changed, the Dow has too -- its current composition bears little resemblance to the heavy-industry lineup that dominated the roster throughout much of the 20th century.
But is the Dow really an accurate representation of American business? At the moment, its 30 components can be broken down into the following sectors:
Technology / Telecom
Consumer / Retail
Source: Yahoo! Finance.
But this doesn't fully reflect the way these sectors are weighted. The Dow is price-weighted, which means that shares that cost more will have more of an impact on the index's movements. Here's how that looks when we break it down by sector, based on the most recent weighting data available:
Dow Sector WeightingsCreate Infographics.
As you can see, the Dow's financial components are well-represented, but it looks like industrial and energy stocks get short shrift. Can banks and insurance companies really be so important to the American economy that they can exert roughly twice the pressure on the Dow's movements as the tech sector, and nearly four times the pressure as the health care sector?
Probably not. According to the Bureau of Economic Analysis, the finance and insurance industries accounted for roughly 6.6% of U.S. GDP in 2012. Things look a bit better if you lump this grouping together with real estate services (as the BEA does), which brings the sector's total contribution up to a whopping 19.5% of GDP. But none of the financial companies on the Dow can rightly be called part of the "real estate" industry, even though JPMorgan could loosely claim affiliation by pointing out its mortgage operations.
How should these sectors be rebalanced? Do they need to be? Or is this just another sign that the Dow is simply no longer really relevant to the modern investor? Let us know what you think by leaving a comment below.
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The article Does the Dow Really Represent the American Economy? originally appeared on Fool.com.
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