Which is Performing Better, the Dow or the S&P500 ?

The short answer is, depends on how you calculate it.

The results of looking at these two indices from various angles may surprise you.

The Dow is at an all time high, the S&P500 a few percent below. But it turns out that, as a whole the SPX is doing much better than the Dow.

The New York Times’ Floyd Norris gives us the details:

"The Dow is normally calculated as a price-weighted index, meaning that stocks with the highest price for a share get the heaviest weighting. That is largely a historical accident, as it was the easiest way to do it in the 19th century, when the best calculator available was a person with a pencil.

The most common method of calculating indexes is by market capitalization, in which the companies with the largest market value count for the most. The chart [below] shows how the Dow would look if it were calculated in that manner, instead of the other.

While the Dow is up 18 percent from March 24, 2000, when the S.& P. peaked, it would have been down 8 percent had market capitalizations been used in the computation. That reflects the fact that some of the Dow stocks that did the worst, including General Electric, Microsoft, Intel and Pfizer, are large capitalization stocks that had relatively low share prices. That meant they had little impact on the Dow as normally calculated, but a large effect on the Dow as computed using capitalization figures."

What about equal weight computation? Hasn’t that ETF (RSP) out performed the standard S&P500? Glad you asked — yes, yes it has:

"The third method often used in index calculations is one of equal weighting, which assumes that one puts the same dollar value into each stock in the index.

The chart [below] shows that the S.& P. 500, calculated by market capitalization, is still 2 percent below where it was on March 24, 2000. But that reflects poor performances by some of the same very large companies that starred before 2000 and have not done as well since. Calculated by equal-weighting, the S.& P. 500 is 82 percent higher than it was in 2000."

The following charts show Dow and S&P500 performance since March 24 2000 (the day the S&P500 peaked):
click or much larger graphic


Graphic courtesy of NYTimes;
Sources: S&P, Bloomberg


It would be interesting to see a price-weighted version of the SPX, or a an equal-weighted version of the Dow.

Norris adds that by the market capitalization version makes clear that "the Dow has
underperformed, even if it is the Dow that is the index setting records
these days."

Of course, all of these measures are domestic. Measured in euros, the price-weighted Dow is 15% lower than its 2000 peak . . .


The Dow May Be at Its High, but Its Performance Is Still Lacking
NYT,  April 28, 2007

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  1. Winston Munn commented on Apr 28

    It is most likely my own lack of sophistication that causes my consternation, but to me it seems that the reason for the sample should determine the configuration. What is it exactly that we are trying to measure?

    The indices as constructed have always smacked a bit to me as hedonic adjustments with the weighting of some companies while dropping others from time to time and adding better performing equities – Dow ex-losers.

    To actually know the comparison of today versus the year 2000, should not that comparison be based on the same equities and weighting that comprised the index at that time?

    To my simple thinking, if what I want to know is a comparative measure of the how the market overall performs day-to-day, week-to-week, and so on, then the most telling numbers would be in the performance of the top (X) number of actively traded issues from each sector or industry with a bottom line dollar-per-share criteria to weed out the extremely low-end stocks. Each stock would be measured against its previous day’s closing price so the end measurement would simply be an average percentage of change and total dollar volume either into or out of the most active issues.

    That, to me, seems like more useful comparative information that the current indices.

  2. Charles Butler commented on Apr 28

    Ah, The Dow. Such a small selection that, by random happenstance, it managed to configure itself into an almost perfectly hedged investment for over two years. Everything in the world went up, except herself.

  3. SINGER commented on Apr 28

    Not that any top calling has been a money maker lately…but yesterday the cover of NEWSDAY on LI was to the effect of the “markets going up find out how to make money”

    along the lines of the DOW performance vs. the EURO or GOLD you never hear anything about real gains as compared to nominal ones…

    Isn’t the most important fact that the USD has lost a large portion of its buying power over the years and that the “avg american family” now needs two parents working full time to make ends meet whereas before one was more than enough…

    In other words, as cool as things are here, for most people things are taking a turn for the worse and have been trending down…

    Regardless of what some number says…The focusing on the number is just so much sleight of hand because a person can tell if they are better or worse off than they have been…

    I always go back to the fact that the German Stocks exploded to the upside nominally as the currency lost buying power…

    Just as an example…


  4. Rosie Pinguis Sus Scrofa commented on Apr 28

    I agree with Winston, comparing S&P 500 in 2000 to S&P 500 in 2007 is like comparing Clinton to Bush – there is nothing in common between them other than both use/used the White House.

    Over the years, S&P got rid of the losers and replaced them with the winners. For instance, Google was not in S&P 500 in 2000.

    You cannot compare both as equal; it is like substituting apples with cantaloupes and making statements that out apples got lager over the years.


  5. m3 commented on Apr 28

    thanks for the article link.

    marc faber made a similar observation about the short term behavior of the chinese indices over the last couple months.

    although the shanghai composite is at an all time high, many of the individual stocks still haven’t fully recovered from the february sell off. (e.g., PTR, CEO, CHL, CHA, LFC, etc.)

  6. Macro Man commented on Apr 28

    Funny how all of these comparisons about US equity indices in another currency are never in yen. I wonder why….

  7. Winston Munn commented on Apr 28

    Speaking of markets, I think it is time to rid ourselves of the outdated metaphors of bull market and bear market, as recent biological studies have proven the nomenclatures invalid. Bulls are simply big creatures, not very bright whose main goal in life is to mate with cows – they are fairly uninteresting unless one is trying to A) stick a sword in its back from inches away after it has been tortured by your look-a-likes, B)trying to stay mounted on its back for 8 seconds while the creature’s testicles are tied together with rawhide, or C) trying to outrun one down some silly Spanish street not wide enough to allow the passage of two passing motorcycles. This, in my mind, does not fit the mental picture of a “bull market” nor with the bright and well-spoken “bulls” I know.

    Likewise, a bear is a fairly docile creature that spends half its life asleep, is fat and hairy (OK, so maybe this part applies but that is inconsequential to this debate), and only rouses to action when their is food nearby or its cubs are in jeapardy. Again, not the image I have of a “bear market”. (Some bears, yes, but the market, no.)

    Therefore, I am suggesting it is well past time to have new metaphors for the markets and I just happen to have a couple of suggestions.

    1) In lieu of “Bull Market”, I suggest the metaphor “Puffer Fish Market”. The puffer fish is actually normal sized unless it senses danger, then it swells up to a much larger size to intimidate enemies, while parts of the puffer fish are toxic to humans.

    2) In lieu of “Bear Market”, I suggest the metaphor of “Boomslang Market”. Quote: This snake is one deadly animal because of its preference for aerial positioning in tree tops. Hard to see in the thick forest cover, the Boomslang Snake is well camouflaged and strikes without giving any warning signal.”

    So is there a danger of the current Puffer Fish Trend being attacked by the Boomslang reversal?

  8. Steve commented on Apr 28


    I like the ideas, but I’m not sure a Puffer Fish statue would look all that cool on Wall St.

  9. Winston Munn commented on Apr 28

    Yes, but just think of the great T.V. ads:
    “At ____, we’re puffed on America.”

  10. Philippe commented on Apr 29

    Since today’s post seems to be under the auspice of a visit to a zoological park and derived metaphors may be Lafontaine fable « The frog and the ox » would fit?
    As the frog willing to impress an ox decided to puff to the extreme limit of its capacity until the frog busted.
    In this case the frog would be the substitute for the bull and it would not require much skill to make the difference between a frog and a bull.

  11. Craig commented on Apr 29

    Hey Guys and Gals,
    Now that Chindia is argued to be the supposed engine of the world, have you all had a look at the supermarket to the engine of the world lately?

    Have a gander at the Auzzie All Ordinaries and that lovely money flow combined with exceeding the upper channel of the trading range. Can you say “distribution”?

    Now why would DOW industrials/export/ commodity giants be doing so well when the All Ordinaries is flashing the TOP sign?
    If the commodity supermarket is slowing, who buys Caterpillar D-9’s?

    Still think the consumer is king?
    Have a gander at the trannies. Don’t miss Fed Ex and UPS, include those as a comparison to the average. They won’t be near the top of that chart. Nope, they are being left behind.

    Who ships UPS and Fed Ex? (hint: you and me) Rails and truck? (hint: NOT consumers.

    So, is the DOW going to pull the All Ordinaries up or is the all Ordinaries the canary?

  12. Winston Munn commented on Apr 29

    While U.S. citizens are being polarized between rich and poor, perhaps the same thing is happening in the markets between multinationals and mostly-domestics.

    With the dollar dropping daily, the more overseas aggregate component the better, while domestics have to rely on failing U.S. consumers and the lure of foreign tourists who are harassed by Homeland Security on the way in, making the U.S. a destination less attractive.

    So maybe neither will influence the other; maybe they will simply continue to diverge.

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