The Dow Jones is no longer a good proxy for the U.S. economy. In the post-coronavirus world, it will be even less relevant.
The U.S. stock market rose in lock-step on Tuesday. But something strange – and far more interesting – happened to the Dow Jones Industrial Average (DJIA) yesterday.
The Dow fell 1.4%. But the Nasdaq 100 jumped more than 1%.
As far as I can tell, that hasn’t happened in the entire history of the Nasdaq 100, since 1985.
What’s going on? Well, perhaps investors are finally realizing the Dow Jones is a terrible proxy for the U.S. economy.
The Nasdaq 100, with its emphasis on innovation and technology, may now present a better indicator of the modern, post-coronavirus world.
This might the end of the Dow Jones’ dominant reign.
I’m not the first to point out the failings of the Dow Jones index. Created by Charles Dow in 1896, it was intended to act as a “proxy for the broader U.S. economy.” But the Dow is deeply flawed. Professor Jeremy J. Siegel at the Wharton School summed it up.
No one would build a stock market index that way today… It’s a crazy way to measure the market.
The Dow contains only 30 companies, with some sectors of industry completely excluded (like utilities). Worse, the index is weighted by share price instead of market capitalization, which means one company, Boeing, has a wildly outsized sway on the entire stock market.
The New York Times wrote:
Boeing alone accounted for 24 percent of the entire rise in the Dow Jones [in 2017].
So, even before the coronavirus crisis, the Dow Jones was a poor reflection of the American economy. And it’s about to get even worse.
We’ve never seen a combined health and economic crisis like this. Ever.
It will change our entire lives and the economy around us.
The 30 companies in the Dow Jones will quickly become irrelevant.
The Dow’s brick-and-mortar retail components like Wal-Mart and Walgreen Boots will struggle to adapt in a fully digital world.
The oil companies – Exxon Mobil and Chevron – are under severe pressure. The current supply and demand shock in the oil industry will take years to recover.
The legacy health and pharmaceutical companies – Merck and Pfizer – can’t react quickly enough to this current crisis.
The banks – Goldman Sachs and JP Morgan – are rapidly losing trust and credibility. Many Americans now trust tech companies more than their own bank.
The coronavirus crisis and the enduring lockdowns will fast-track innovation. It will completely transform the world around us, not through slow adoption, but through absolute necessity.
Bio-tech will flourish as governments fast-track vaccine and therapeutics projects and increase funding. Legacy pharma will be stuck on the sidelines.
Main Street will be decimated as commerce shifts to purely online. Direct-to-consumer models will be the new normal. Just look at who’s hiring right now. As the old economy sheds millions of jobs, Amazon is hiring 100,000 and boosting wages.
Consumer technology will boom through tracking devices and monitoring apps. Governments will grant tech companies more powers to collect data, expanding the power of Facebook, Google, and others.
Entertainment will shift away from cinemas and large events to streaming and gaming. We’re already seeing this reflected in spending habits.
Even business travel may never fully recover as companies adopt remote working principals.
Things won’t go fully back to normal. This is a new era and a new economy, rooted deeply in technology. Investor Balaji S. Srinivasan explains:
These trends were happening but now they’ve been accelerated… It’s like women staying at work after WW2. A new normal.
The Nasdaq 100 is a better proxy of this new economy. Shares in Amazon and Tesla are already rising on the future outlook beyond the coronavirus. And while it’s heavily tilted towards technology, the Nasdaq 100 sufficiently diversified, too. It includes consumer components like Starbucks, health companies like Biogen, and travel companies – American Airlines and United.
The Dow Jones Industrial Average and Nasdaq are back moving in lock-step on Tuesday.
The DJIA opened to gains of 432.29 points or 1.85% to recover to 23,823.06, while the Nasdaq rose 2.09% to 8,363.35.
But yesterday, investors started to show their hand. The blink-and-you’ll-miss-it divergence revealed a glimpse into the future.
When we emerge from this crisis, we will live in a fully accelerated digital, tech-immersed economy. The out-dated Dow Jones index will face enormous pressure, but the Nasdaq 100 may finally step out of the shadows.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.
Last modified: September 23, 2020 1:49 PM