What’s the market doing?
That’s a loaded question these days, what with the number of stock market measuring sticks increasing rapidly along with modern computerized investing.
Roundly criticized lately for its narrow nature is the Dow Jones industrial average, which consists of 30 stocks that tend to be blue chip in nature. Because it measures average price movement without regard to market capitalization, higher-priced stocks can have greater influence than lower-priced stocks.
Yet the thick-skinned ol’ Dow has been around in one form or another since 1884 and is devoutly followed by a worldwide audience. Don’t expect it to disappear soon.
Surprisingly, the much-quoted Standard & Poor’s 500 composite index, in its present form since 1957, is misunderstood even by many investment professionals.
This market-weighted index does not actually consist of the 500 largest companies, as many people believe. Rather, it includes companies from the New York Stock Exchange, the American Stock Exchange and the Nasdaq National Market System that tend to be leaders in important industries.
Tracking the market obviously is a tricky business.
“Investors often look at market indicators in a shallow way, saying, `The Dow’s up, so everything’s fine,’ or, `The Nasdaq’s up, so small stocks are doing well,’ ” said John Manley, quantitative strategist with Smith Barney Shearson. “That’s not necessarily true, because you must compare and contrast more than one index to get a true picture.”
Some measures are more worthwhile than others.
“While the Dow is the psychological market indicator, I find the S&P 500 much more useful,” said Ilona DeVito, senior market analyst with Merrill Lynch & Co. “Because the S&P 500 is market-weighted and includes the 500 best stocks in industry, transportation and utilities, it gives the best feel for what the market is doing.”
Don’t fret about how an average or index is doing. Worry about your own holdings. “Investors often make `benchmark error,’ in that they measure their own portfolio to some broad-based measure which isn’t applicable, such as comparing their small-cap portfolio against the Dow,” said John Markese, president of the American Association of Individual Investors.
Some frequently mentioned market measures include:
– The Nasdaq composite index, created in 1971 to measure the Nasdaq National Market System and all domestic common stocks traded on the regular Nasdaq market that aren’t part of the National Market System. Includes about 4,600 issues.
– The NYSE composite index, a market-weighted index created in 1966 that consists of about 2,500 common stocks listed on the New York exchange and four subgroup indexes consisting of industrial, transportation, utility and finance stocks.
– The Russell 3000 index, introduced in 1984, covering 3,000 large U.S. companies, determined by market capitalization. Represents 98 percent of the U.S. equity market.
– The Russell 2000 index, introduced in 1984, featuring the 2,000 smallest securities in the Russell 3000 index. Widely regarded as a small-capitalization index.
– The S&P MidCap 400 index, created in 1991, reflecting the mid-capitalization range, with stocks having $200 million to $5 billion in market value. Stocks in the S&P 500 are excluded.
– The Value Line geometric composite, started in 1961, an equally weighted price index of all 1,700 stocks covered in the Value Line Investment Survey.
– The Wilshire 5000 equity index, introduced in 1974, consisting of all U.S.-based equities, including common stock, real estate investment trusts, or REITs, and limited partnerships. Includes 5,840 securities.
– The Wilshire 4500 equity index, created in 1987 to aid money managers. Consists of the Wilshire 5000 minus stocks in the S&P 500. Performance published monthly.
– Wilshire Small Cap index, begun in 1991 and encompassing 250 companies, with average market capitalization of $400 million. Selected by market capitalization and industry sectors from securities No. 751 through 2500 of the Wilshire 5000.
“As an independent investor, I would use the Dow, the S&P 500 and the Wilshire 5000 in my investing,” counseled Albert Neubert, director of index products for Standard & Poor’s Corp., who readily acknowledges a professional and personal bias toward the S&P 500. “Everything beyond those three is peripheral.”
