The Dow Jones Industrial Average set a startling record that shows just how flawed it truly is

The past few days in the stock market have been so wild—a plunge on Monday, a sharp pivot upward on Tuesday, a rise with lots of oscillations on Wednesday—that a record set by the Dow Jones Industrial Average on last week’s final day of trading has been largely overlooked. That’s unfortunate, because there’s a lot to be learned from that record about how financial markets work.

I’m referring to the record loss inflicted on the Dow last Thursday by the three-digit share price drop of UnitedHealth Group (NYSE: UNH), the large healthcare and insurance company. (Thursday was the last day of trading last week because the market was closed for Good Friday.)

That price decline—a whopping $130.93 a share, about a 22% drop—cost the DJIA 805 points.  

That’s the biggest daily Dow decline ever caused by a single stock, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. The DJIA dropped 527 points that day, with UnitedHealth responsible for the entire loss. Had UnitedHealth just stayed even, the Dow would have been up close to 300 points.

How could a single stock inflict that much damage on the ever-popular Dow, the pioneering market metric that was created in 1896 by financial reporters Charles Dow and Edward Jones?

It’s because the DJIA is an average based on the share prices of its 30 component stocks. Unlike most stock market indexes, this one is not based on its components’ market values. So a dollar change in the share price of any Dow component—be it UnitedHealth or Apple, which has about 15 times as many shares outstanding as UnitedHealth does—has the same impact on the Dow as a change in any other component.

The Dow Divisor, the market metric used to calculate the value of the DJIA, means that every dollar change in any one Dow component these days moves the DJIA about 6.15 points.

Even with its huge drop last week, UnitedHealth is still the second-highest-priced stock in the Dow, behind only Goldman Sachs. So the DJIA is still vulnerable to another sickening day for UnitedHealth shareholders. Or, for optimists, a sharp UnitedHealth rise could set off a sharp Dow rise. 

The Dow is based on share prices because when Dow and Jones created it back in the day and it had only 12 stocks, the only metric available for them to use was share price. Companies’ market values—which are used to calculate modern metrics like the Standard & Poor’s 500 Index, the Nasdaq Composite, and the FT Wilshire 5000 Index—weren’t available 129 years ago. 

The day before UnitedHealth’s sickening plunge last week, the company’s weight in the Dow was 9.1%, but its weight in the S&P was only 1.2%, according to Silverblatt. By the end of the day Thursday, its weight had fallen to 7.3% of the Dow and 0.9% of the S&P.

If you do the math, you’ll see that if you had $10,000 in a Dow index fund when the market opened last Thursday, UnitedHealthcare’s plunging price would have cost you about $207. By contrast, if you had $10,000 in an S&P 500 index fund, your UnitedHealth loss was about $27.

That’s an example of why about $9 trillion was indexed to the S&P in 2023 (the most recent date for which data is available), according to S&P Dow Jones Indices, but only about $76 billion was indexed to the Dow.

Please keep all of this in mind when people mistakenly refer to the DJIA as
“the market.” Sure, the Dow is a long-standing, venerable metric. But despite the massive exposure that Dow changes get each day, it is not the whole stock market. 

For that matter, neither is the S&P 500, which was launched in 1957 and is used by many investors and institutions as a performance benchmark. But as we can see from UnitedHealth’s disproportionate market impact on the DJIA relative to its S&P impact, the S&P measures a lot more of the market than the Dow does. Which makes it a far more useful and accurate metric. And that, as they say, is the bottom line.

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