Monday, November 25, 2013

16,000... Somethings

The Dow Jones Industrial Average is over 16,000 for the first time and on a pace of hitting regular all-time highs. Which is nice if you're in that line of work, but for a lot of people, if the economy is doing well, they're not seeing it in their own lives or neighborhoods. And besides, what does the Dow being at 16,000 actually mean? Not in terms of implications. Like, literally. 16,000 what?

The short answer is that it's an average of the 30 stocks in the index, taking the total price of those stocks and dividing it by what's known as the Dow Divisor, a number regularly changed (PDF) to reflect stock splits and spinoffs andsuch that have had an effect on things since the creation of the average in 1896 (the index itself has been around since 1885). Inflation, it should be noted, is not calculated in the divisor. You can find the current divisor at the Wall Street Journal website, among other places. As I post this, the divisor is 0.15571590501117, which at Friday's close of 16064.77 would basically mean it would cost you $2,501.54 to buy one share of stock in every company in the Dow.

Which, of course, means way back at the start of the index, you needed to only average out the prices of the stocks in the index to get your number. Which was done, by hand, first by Charles Dow and then by Arthur 'Pop' Harris, until 1963, when computers finally took over the task. Harris worked out the math, every hour on the hour, by hand I remind you, and got some rather bloodied hands from pulling out the ticker tape.

This is the main goal of any stock market index: to measure itself against itself, and the Dow measures itself against, in essence, its original close of 62.76 on February 16, 1885. The Dow got its original index number organically, as did Japan's Nikkei index, but a lot of other indices, such as the NASDAQ, get their number by measuring against a preset par value. In NASDAQ's case, that par is 125, where it was set at the start of 1994. That's, in essence, what the number means: how the market is doing in relation to the time the index number was originally set.

Whatever relevance that original number may or may not have to today.

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