For much of the past month, investors have been fixated on the Dow Jones Industrial Average’s quest for its first print above 20,000. And while the index hit a high of 19,999.63 on January 6, it has yet to breach the psychologically important level.
During the Dow’s rally, which has amounted to more than 8% since the US presidential election, a lot of focus has been placed on which stocks could propel the index over that big round number. It’s because the average is heavily dependent on the moves of individual stock prices, and exposes a big criticism in the way the Dow continues to be touted as a benchmark for the whole market.
Because the Dow is a price-weighted average, the higher a specific stock is priced, the bigger the impact it has on the benchmark’s price.
On the other hand, the Standard & Poor’s 500 is a market cap-weighted index, meaning that the bigger the size of a company, the bigger its impact on the index.
For example, while Goldman Sachs is the highest-priced stock in the Dow at $244.30 and accounts for 8.4% of the Dow, the bank only carries a 0.5% weighting in the S&P 500. Goldman has gained about 35% since the election, and has been a big reason for the Dow approaching the 20,000 level.
Meanwhile, General Electric, which is among the lowest-priced stocks in the Dow at $31.36, carries a 1.1% weighting in the Dow and a 1.4% weighting in the S&P 500.
And, in the same period that the Dow has risen 8%, the S&P 500 is up about 6%.
The chart below shows the weightings of the 30 Dow Jones components versus their weightings in the S&P 500.