September 2002

Why the DJIA is Full of Shit
Economic Non-Cents

A daily amusement of mine is listening to the news and hearing how the wonderful Dow Jones Industrial Average did that day. On my half hour commute home I can hear it several times and during the day, whenever I check the New York Times online, I can see where the DJIA is. What makes this thing so fucking funny is how absolutely irrelevant it is to anything at all and how seriously everyone takes it.

The DJIA is an index, that is, it is a select group of companies, in this case those that make tangible things (thus the name industrial), aggregated, and each share price is made equal, since every company has a different number of outstanding or tradable shares, which the price is suppose to reflect. Amongst the 30 companies, yes only 30 companies dictate how commentators and the population judge how the economy is doing, are: Ronald McDonald, Mickey Mouse, Marlboros, Ma Bell, Standard Oil, and that fucking Word paper clip (below is the full list).

On top of the fact that this list of companies does not accurately reflect the total industrial output of the United States (most of these companies rely on third world countries for their manufacturing) is that their daily prices, thus the aggregated price represented on the DJIA, has as much do to do with reality as Mickey Mouse and Ronald McDonald put together (apologies to Willard Scott). It has been demonstrated, as early as 1905, that stock prices follow a random pattern (in fact for all of you pseudo-intellectuals out there, it is the same random pattern that a Mr. Albert Einstein used in his 1905 paper on atomic motion, Brownian motion). For empirical proof, one can show any trader a series of line graphs, some randomly generated and other reflecting real prices, and they won't know the difference.

The reality of daily stock prices reflect more of a trader's gut instinct (which has been tempered with years of practice and having their bonuses linked to picking winners) than to any real market fundamentals. And these traders are looking for the short-term fix; the longest amount of times these guys look at is the end of the quarter.

So as you are listening to the stock market report and fretting about what a shitty day it is for the economy since the DJIA went down 3%, remember that it only as real as you want it to be. The real status of the economy is all around you, just open your eyes. Look at the people on your commute to work or at lunch: are they fearful of losing their job? are they confident that the bills will be paid tomorrow? is the repoman looking at them next?

For those of you out there who still wanna give a shit about the stock market, I would suggest looking at the Nasdaq Composite (100 companies) or better yet, the S&P 500 (500 companies). But even those these indices, which have a broader range of companies, still operate under the same circumstances as the DJIA-traders looking for the quickest buck.

Next Month: What Tinkerbell and the Dollar Have in Common

In the interest of fair disclosure, below are the 30 companies that make up the DJIA in order from Yahoo! Finance: Aloca, GE, Johnson & Johnson, Microsoft, American Express, General Motors, JP Morgan Chase, Proctor & Gamble, Boeing, Home Depot, Coca Cola, SBC Communications, Citigroup, Honeywell, McDonalds, AT&T, Caterpiller, Hewlitt Packard, 3M Company, United Tech, DuPont, IBM, Phillip Morris, Wall Mart, Disney, Intel, Merck & Co, Exxon Mobil, Eastman Kodak, and International Paper Corp.