When someone asks me “How is the market doing today?”, I can’t always give a quick and easy answer. That’s because we typically equate “the market” with one of several market indexes, but each index gives us different information.
In the U.S., the most-referenced indexes are the Dow Jones Industrial Average, or “Dow”, the S&P 500 Index, and the NASDAQ Composite.
The Dow, founded by Charles Dow dating all the way back to 1896, is the oldest of the three. In 1928, the Dow expanded to 30 large, U.S. companies, often called “blue chips.” While it is no longer limited to industrial companies, the Dow is not a great indicator of the overall markets; rather, experts consider it to be a snapshot of how U.S. blue chip stocks are doing.
The S&P 500 evolved from an earlier market index and was formed in 1957. It contains roughly 500 large, U.S. companies. While many investors think of the S&P 500 Index as representative of the broader stock market, it is most appropriately used as a benchmark for large, U.S. equities.
The NASDAQ Composite is the newest of the 3 indexes. Its start coincided with the launch of the NASDAQ, which opened as the world’s first electronic stock exchange in 1971. It is commonly thought of as the “technology” index, but it has a lot of growth stocks in addition to tech stocks. The NASDAQ Composite is actually a broad index of NASDAQ-listed stocks. Unlike the other 2 indexes, the NASDAQ Composite includes some smaller companies, as well as quite a few companies headquartered outside of the U.S.
In addition to the different types of companies represented by these 3 indexes, each one has its own unique weighting system to determine the value of the index on a given day—more on that in a future article. Because of this, and because of the different types of companies that are represented by each index, on any given day of trading one index can go up while another goes down.
A local analogy would be thinking about Kirkwood, Heavenly, and Palisade on a winter day in Tahoe and asking “is the snow good?” Often, snowstorms come through the region and dump beautiful, fresh powder, and all 3 resorts have great skiing. Other times, Kirkwood could get 18″ of powder, Heavenly gets 9″, and Palisade gets just a few inches—or vice versa. Great snow conditions at one resort do not guarantee great snow conditions at all of them!
Back to the initial question, “how is the market doing today?” On a day when all 3 indexes move in the same direction, we know how a large portion of the market is performing. But if the NASDAQ Composite is down while the S&P 500 and the Dow are up, for instance, the answer is more complicated, and a look at a broader range of investments beyond the indexes is probably necessary.
My final word is that none of these 3 indexes truly represents the broad stock market, let alone a well-diversified investment portfolio. It can be useful to track these indexes, but you should recognize that your portfolio’s performance may not closely match any one of them.
How ever you invest your portfolio, invest smartly and invest well!
Larry Sidney is a Zephyr Cove-based Investment Advisor Representative. Information is found at https://palisadeinvestments.com/ or by calling 775-299-4600 x702. This is not a solicitation to buy or sell securities. Clients may hold positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
