The ‘markets’ aren’t the economy

Alex Hern looks at how a chance change in the make-up of the Dow Jones would lead to a 2000 point difference, and asks what this tells us about economic decision-making

 

If one decision made by one stock index in 2009 was slightly different, the entire narrative around the great recession would be altered – despite nothing on the ground having changed at all.

The Dow Jones Industrial Average (DJIA), one of the key indexes for measuring the strength of the American economy, rarely changes the makeup of the companies it records. But on June 8, 2009, they made two changes, swapping Citigroup with Travelers and General Motors with the computing company Cisco.

On Monday, Adam Nash looked at what would have happened if they’d chosen another technology firm, Apple, instead of Cisco:

In real life, the Dow closed at 12,874.04 on Feb 13, 2012. However, if they had added Apple instead of Cisco, the Dow Jones would be at 14,926.95That’s over 800 points higher than the all-time high of 14,164 previously set on 4/7/2008.

Can you imagine what the daily financial news of this country would be if every day the Dow Jones was hitting an all-time high? How would it change the tone of our politics? Would we all be counting the moments to Dow 15,000?…

The Dow already decided to make a change in 2009. They decided to replace a manufacturing company (GM) with a large hardware technology company (CSCO). They could have easily picked Apple instead.

The end result? People talk about the stock market still being “significantly off its highs” of 2008.  In truth, no one should be reporting the value of the DJIA. But they do, and therefore it matters.

The point to take away isn’t about Apple versus Cisco; it’s about the fallibility of using measures of economic health that bear no relation to the life lived by the majority of the population.

When economic policy is aimed at keeping markets happy and indexes high, it is aimed at an abstraction of the economic measures that actually matter: growth, inflation, and unemployment.

Sometimes it can work. Sometimes, as with the DJIA, it doesn’t. The lesson for those who keep an eye on such things is to learn when to tell one from the other.

See also:

Credit rating agencies beaten by a spreadsheetAlex Hern, February 16th 2012

Transforming the financial sector from a bad master to a good servantStephany Griffith-Jones, February 16th 2012

Daily Mail 2009: Ratings agencies ‘critical’, 2012: ‘Doom-mongers’Alex Hern, February 15th 2012

Small businesses can play a vital role – but only if they get the finance they needTony Dolphin, February 2nd 2012

The UK isn’t Greece, it’s IcelandAlex Hern, December 21st 2011

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13 Responses to “The ‘markets’ aren’t the economy”

  1. leftlinks

    Left Foot Forward – The ‘markets’ aren’t the economy http://t.co/0DfeXqw7

  2. Patron Press - #P2

    #UK : The ‘markets ’ aren ’t the economy http://t.co/xSWy5oTe

  3. Kevin Khayat

    The 'markets' aren't the economy: http://t.co/uGAgii4W When a 2000 point chance has no effect on lives, why does it matter? by @alexhern

  4. Paul Southworth

    MT @leftfootfwd: The markets aren't the econo: http://t.co/rEQ996TT When a 2000 point change has no effect, why does it matter? by @alexhern

  5. Awake!

    it’s the SP that counts, not the dow cos if you’re half in the know then u know the dow is price weighted rather than the SP which is mkt cap weighted. A price weighted index means a 2 bn dollar company has the same impact on basket calculation then a 22 bn, which is nonsense. Only the media and finacial reporters stick with Dow cos they know less than some investmnt bankers even… lol

  6. Alex Hern

    Dow 15000: http://t.co/yfjfCMMx When a 2000 point chance has no effect on lives, why does it matter?

  7. Trakgalvis

    The 'markets' aren't the economy: http://t.co/uGAgii4W When a 2000 point chance has no effect on lives, why does it matter? by @alexhern

  8. Helen Thomas

    The 'markets' aren't the economy: http://t.co/uGAgii4W When a 2000 point chance has no effect on lives, why does it matter? by @alexhern

  9. BevR

    The 'markets' aren't the economy: http://t.co/uGAgii4W When a 2000 point chance has no effect on lives, why does it matter? by @alexhern

  10. Snapdragon

    The ‘markets’ aren’t the economy http://t.co/O3oy5Kbi

  11. TheCreativeCrip

    The 'markets' aren't the economy: http://t.co/uGAgii4W When a 2000 point chance has no effect on lives, why does it matter? by @alexhern

  12. Patrick

    Why do you refer to ‘the markets’ in your title? Your article isn’t about markets, it’s about the DJIA, a single, and narrow index. The S&P 500 is the one that’s followed. If you really wanted to prove that ‘the markets’ don’t reflect the economy then you would need to write an article on the S&P.

  13. Bart Yacht

    The 'markets' aren't the economy – http://t.co/SYDhrWHv

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