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With its 0.04% gain on Thursday, the Dow finally snapped its 10-day losing streak, the worst since the 70s.
This week's performance reminded us again why the historically important index is now more historical than important, having long since relinquished its role to the S&P 500.
Before the market dramatic response to the Fed on Wednesday, the Dow had been running counter to the S&P 500 and Nasdaq and was in historical funk.
A good portion of the why came from a dose of bad luck: While almost all of the Magnificent Seven stocks were up, the Dow's exposure lacked the two biggest gainers – Tesla and Alphabet – and instead had Nvidia , which has had a hard month. (The Dow recently added Nvidia in November, kicking a Intel is struggling out.)
Moreover, the Dow had UnitedHealthcare, which has been down about 20% this month, earning losses twice as bad as the second-worst performer, Chevron.
But this bad luck masks the “real problem,” which has been the index's major advantage for so many decades: its price-weighted indexing. Instead of using the market capitalization system, the index is calculated by the ticker prices, which are only related to the actual valuation if you consider how many shares there are. Great for the pre-internet era when you had to calculate quickly without much information, but it makes for some head-scratching statistics now, as our Chart of the Week shows.
For example, because it trades at nearly $500 a share, UnitedHealthcare ($452 billion market cap) has the second heaviest weighting of the Dow at 7%. Microsoft, with a cheaper share price, is third, with 6%. But Microsoft is worth almost seven times as much.
You can do this for many of these: Paint company Sherwin Williams is weighted about 1.5 times higher than Apple and is worth only 2.3% of what the tech giant is.
And the prices do not list the stocks for weighing purposes only; they make them move differently. A $10 move is the same no matter what company we're talking about, even though it's a huge 50% jump for a $20 stock and a much smaller 5% deal for a $200 stock. The index doesn't care.
The Dow is not the only index to use this method. Japan's Nikkei 225 is also price-weighted rather than using the market capitalization method which uses the overall value of the components, weighted by size.
Having this in the back of your mind is helpful in parsing headlines and statistics about the state of the market because every now and then we get another episode of “Price-weighted index gone wrong.”