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10,000 is just a number

There has been a sudden flurry of interest in the magic 10,000 number now that the Dow Jones Industrial Average is close to that number once again. For example, Steven at Poliblog writes "The point of the Dow 10k reference is that it would be a powerful symbol of economic recovery for the Dow Jones Industrial Average to return to five digits" (see More on the Dow and that Magic 10k Figure). And in today's Wall Street Journal we read that "the Dow Jones Industrial Average has had a problem with the number 10000 that isn't entirely different from the problem the Chicago Cubs and the Boston Red Sox have had with their World Series dreams" (see Investors Battle Curse of 10000 - subscription required).

I say that all this talk is much ado about nothing. The Dow Jones Industrial Average (DJIA) blew past 10,000 and then 11,000 at the end of the big stock market bubble. Then it sunk below 10,000, below 9,000, and then below 8,000 on the way down. There's no evidence that 10,000 has any kind of significant implications for the movement of the DJIA. It's just another number that the DJIA has to pass on its way up and down. It's no different than 9,854 (to make up a meaningless example).

I wish the news media and bloggers alike would focus more on what the number means rather than its absolute value. What does 10,000 mean in terms of price/earnings ratio, price/dividend ratio, price/sales ratio, or price/book value ratio? I'm sure all these ratios are unusually high compared to historical averages, which is something we should be more worried about than whether or not the DJIA will cross 10,000 in the near future.

The Dow Jones Industrial Average isn't even a very good indicator of true stock market values. Containing only 30 stocks, not being market capitalization weighted, and intentionally excluding non-industrial companies, it only gives us a partial picture of how the stock market is doing. The pundits would do everyone a great favor if instead they started talking about the S&P 500 index, which gives a better picture of the market because it contains 500 "leading" stocks and it's a market cap weighted index. The DJIA may have been a good index for the 1920s when computers didn't exist and it would have taken someone days to calculate an index like the S&P 500 by hand, but its usefulness has passed and it's time to leave it behind.

The S&P 500 crossed back above 1,000, on August 28th, with absolutely zero fanfare.

posted Monday, October 20, 2003