Over the past week I’ve been seeing more attention paid to the Dow that I ever have, and at the moment it’s down to 9,950. This is the lowest I’ve ever seen it, though no doubt it has hit this low before and rebounded back up to the 13-14k marks. What does it mean when it gets this low, and why is 10k considered a “benchmark”? Does low DJI correlate to anything that will affect a layperson without any money in the stock market?
The number 10K doesn’t “mean” anything, although it does have significance to numerologists. The fact that the Dow has fallen sharply over the last few weeks means that investors think that corporate profits and the economy as a whole are going to be pretty bleak near-term.
It’s not meaningless at all.
If that’s the lowest you’ve ever seen it, you’re pretty young. I remember not all that long ago when people were wondering when would be the first time the Dow would rise ABOVE 10,000.
It is, however, lower than when Bush took office, and below 1999 levels. It’s not the worst of his administration, though: that would appear to be in 2003, when it was down around 8,000.
You can draw whatever conclusions you like.
Apparently the OP is coming up on his fourth birthday.
The significance of the Dow as a reading of the state of the market and the U.S. or world economy, as opposed to other market indexes, is certainly debated. You can see that at the Wikipedia entry. There’s no technical significance to 10,000 as opposed to 9,900, which I’m sure is what beowulff was saying. It’s just a round number. It’s not a benchmark, like two consecutive quarters of negative GDP growth = recession.
Fair enough. I didn’t pay too much attention to it when I was in my early teenage years, so aside from occasionally seeing the number flash across the screen on the news I have very little knowledge of it. Looking at the graph on wikipedia it does show that the Dow has grown exponentially over my life time. That said, it has still fallen over 4000 points this year, and at the rate it has declined over the past week, it seems a fair assumption that it might fall even further. How does the loss of 4000-5000pts in the market relate to people not heavily invested in the stock market? Newspapers post losses in headlines, which leads me to believe that the number has some significant value. But being no economic wizard, it is hard for me to extrapolate something meaningful from losses or gains in this number. Hence my question: What does a loss of this magnitude mean for everyman?
If you’re not in the stock market, then the current losses probably won’t mean much to you financially. The credit crunch is a far more meaningful problem for the average person.
The DJIA is the most commonly reported index, but it only represents 30 stocks of large companies. Look at something like the Standard and Poors 500 (S&P 500) for a broader view of how the market is doing.
Likely the biggest hit to “everyman” are those nearing retirement. Most, if not all, retirement funds are invested in the stock market…usually in mutual funds. When the market drops like this many people will see their retirement investments seriously impacted. If you are of an age where you are about to retire this could be very significant. For younger people there is a good bet their retirement funds will improve in the future so they should be ok in the long run.
Additionally, this could cause companies to start laying people off or outright go out of business.
It’s very hard to say for a couple reasons. First and foremost, the relationship between the stock market and the economy as a whole is complicated (to put it mildly). If the market experiences a large loss and then makes it up the next day, that’s interesting, but it doesn’t have any consequences for non-investors. If the market stays down for a while, we’re looking at a recession, but you won’t need a stock index to tell you that.
The second issue is that the DJIA is a flawed measure of market performance. It’s much better to look at the S&P 500, which uses more companies and a more reasonable weighting system, to get a feel for how investments are performing. You can see a nice chart over at Google finance, but do take a look at the chart extending back to 1970 as well as the last few days.
Probably less opportunity for jobs, higher costs for goods and services. Less money in the economy means less money for businesses to hire new employees which means less spending from the folks who keep the economy spinning.
Although this is true, it’s interesting to note how closely the DJI generally tracks the S&P 500:
Logically, the S&P 500 is a much better index for the reasons you state, but using the Dow as a barometer has historically lead you to much the same conclusions.
It went below 10k during the 9/11 crash too.
It would be more accurate to say that the same things that cause the price of stocks to decline cause problems for businesses. Few companies would lay people off or go out of business solely because of a decline in the DJIA.
To summarize bits and pieces from the other answers, which all seemed correct but didn’t put them together adequately.
Indicators of the stock market as a whole go back to the late 1800s when Charles Dow decided that rather than having to track each and every one of the important stocks of the era separately, it would make sense to put them together into a single handy index. This worked because the same overall market forces tended to affect all the stocks in more or less the same way. Some could go up while others went down but overall the trend of the market could be instantly read by taking them as a whole. There were only 12 stocks in the original index. It was a direct average (hence the name Dow Jones Industrial Average), computed by adding up the share prices of the 12 and dividing by 12.
The Dow went up to 30 stocks in 1928. By that time shares in the stocks had split or issued dividends that were convertible to stocks or other maneuvers that meant that a simple average no longer reflected the stocks. The Dow now uses a divisor that compensates for each of these changes. Because the average share is literally divided by this number, a fraction, the final result is much larger than the price of any individual stock. It reflects the fact that the Dow has gone up, on average, by 5.3% compounded annually over the 20th century. Wiki says that to get an equivalent rise over the course of the 21st century the Dow would have to rise to 2,000,000.
Numbers like that don’t make very good real world sense. The Dow’s high before the depression was 381. Now it goes up and down more than that in a day. It’s very hard for people to get a feel for what that means, as the OP indicates.
There are other stock indexes around, like the S&P 500 and the Wilshire 5000 that track much larger aggregations of stocks and the professionals look at those more closely than the casual watchers. It’s still far easier for everyone, i.e. the media, to focus on the one index everybody, i.e. the public, has heard about.
That explains the Dow but doesn’t explain what it means. Which is very little, as said above. However, the reality is that most of the forces that affect the Dow affect the larger stock market in the same way. When the Dow is falling, it’s usual that most of the stocks being actively traded, no matter what industry or size there are, also go down. Same for a rising market. A few stocks will always go up, no matter how bad the overall market, but with 10,000 stocks in the U.S. the odds that you have those few are tiny.
Does this mean something for you? Possibly. After all, half the families in the country have money in the stock market, through 401Ks and all the similar schemes, through pension funds, through mutual funds, and through direct purchases. For years experts have been advising that people put their money into index funds. Those funds track the overall market and mirror their rise and fall. In the long term you can expect to get 5.3% compounded annually, a good safe return. In the short run, as with all those baby boomers looking to retire, a fall of 20% in the stock market means a reduction of 20% in your portfolio. That can reduce years of patient raises to nothingness overnight.
It’s also true that people have been told not to put all their money in the stock market, but to hedge their bets but putting money into a variety of other investments. Like real estate. Oops. Or commodities. Tanking. Or bonds. Sinking as the junk bonds flooding the system disintegrate.
The simplest reason to worry about the Dow falling precipitously is that it is an indicator of how the rest of the economy is functioning. Unemployment will increase. Wages will fall. Business will close. Buildings won’t get built. Basics from food to travel will become more expensive, or at least relatively more expensive. Everything bad that you can imagine about the economy getting worse will happen and as long as you require money to flow in and out of your pocket on a daily basis, this will dominate your life whether you own a share of stock or not.
That’s why a big fall in the Dow is meaningful for you even if the individual numbers themselves are meaningless. It’s a barometer of the financial system. Like as a really low barometric reading indicates a hurricane, a really low Dow indicates a economic disaster.
Well, it might fall even further, but it also might start climbing again. You can’t predict the future moves of the market by the rate it which it was falling the past week.
Falling below the 10,000 level is just a psychological blow. Similar to 3.00 and 4.00 per gallon of gas.
I can recall wondering what would happen if the Dow went over 1000! I didn’t understand it at the time, but Walter Cronkite said it every night at the close of his evening news broadcast. I was five.
Was there a Dow Jones Industrial Average at the time of the 1929 crash, and if so, what was it before and after the crash?