10:01pm

Wed February 8, 2012
Planet Money

What Do The Dow's Daily Swings Mean? Not Much.

Originally published on Thu February 9, 2012 3:22 pm

Turn on the news on any given day, and you're likely to hear about the Dow Jones industrial average. It is the most frequently checked, and cited, proxy of U.S. economic health. But a lot of people — maybe most — don't even know what it is. It's just the stock prices of 30 big companies, summed up and roughly averaged. That's it.

And what does the daily movement of this number have to do with the lives of most Americans? Not much.

"In 2011, we had days where it would go up several hundred points, and the next day it would go down several hundred points," says John Prestbo, editor and executive director of Dow Jones Indexes. "You can't really argue that the mood and outlook of the entire country was changing that rapidly."

Prestbo doesn't even check the Dow every day.

He says the Dow Jones average is great for a very specific purpose: to get a long-term sense of how the leading U.S. companies are doing. But its moment-by-moment, even day-by-day movements are meaningless. It wasn't designed to be used that way.

In fact, Charles Dow, who created the Dow Jones average in 1896, didn't bother to comment on his own metric more than once a month.

So what happened? How did we develop this 24-hour fixation on the Dow? Blame the Panic of 1907.

This was a severe recession. Banks were collapsing. Everyone was trying to make sense of a disastrous economy. They wanted some handy metric that could tell what each day's news meant.

"So they looked around," Prestbo says, "and they found the Dow Jones industrial average. It took on a life of its own, shall we say."

Newspapers started referring to it. Then, during the Great Depression, it became a daily requirement.

Now, of course, we can follow it every second of the day. We are confused and want to know what the latest scary or hopeful economic news means. So, we look around, and there's still this one thing available. It always has an answer for us, even if the answer doesn't actually mean anything.

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Transcript

RENEE MONTAGNE, HOST:

As the candidates modulate their messages, they keep an eye on changing economic numbers. One of those numbers is the Dow Jones Industrial Average. It's our most common barometer of the economy. And the Dow just broke a four-year high, by the way.

But as Adam Davidson of NPR's Planet Money team reports, it doesn't tell you much.

ADAM DAVIDSON, BYLINE: You hear it so often, it's just the background noise of your day.

SCOTT PELLEY: The Dow gained more than 156 points to close at 12,862.

BRIAN WILLIAMS: So, the Dow went on a run today up 339.

MARIA BARTIROMO, NEWS ANCHOR: The Dow Jones Industrial Average down fractionally, about 17 points, finishing the day at 12,845.

DAVIDSON: That was Scott Pelley of CBS News, Brian Williams of NBC News, Maria Bartiromo of CNBC. They've all read the Dow's latest moves. I should say we, I've done it myself.

We use the Dow to constantly check the temperature of the economy. A lot of people - maybe most people - don't even know what the Dow is. Well, it's just the stock price of 30 big American companies summed up and roughly averaged. That's it. And what does the daily movement of this number have to do with the lives of most Americans? Not much.

JOHN PRESTBO: In 2011, well we had days where it would go up several hundred points, and then the next day it would go down several hundred points. You can't really argue that the mood and outlook of the entire country was changing that rapidly.

DAVIDSON: This is John Prestbo. He's one of the leading critics of the obsessive way the Dow is covered in the media, which is surprising because he's the editor and executive director of Dow Jones Indexes. We asked him how often he checks the Dow.

PRESTBO: Not every day. And I'm one of the people responsible for it.

DAVIDSON: He says the Dow Jones Average is great for a very specific purpose - to get a long-term sense of how the leading U.S. companies are doing. But its moment-by-moment or even day-by-day movements are pretty much meaningless. In fact, the guy truly responsible for it, Charles Dow, who created it in 1896, Prestbo says Charles Dow didn't bother to comment on his own metric more than once a month. So what happened? How did we develop this 24-hour fixation on the Dow? Well, we panicked.

PRESTBO: The panic of 1907

DAVIDSON: Prestbo points out that 1907 was a lot like now - a severe recession, banks were collapsing. Everybody was trying to make sense of a disastrous economy. They wanted some handy metric that could tell you clearly, in an instant, what each day's news meant.

PRESTBO: So they looked around and they found the Dow Jones Industrial Average. It took on a life of its own, shall we say.

DAVIDSON: Newspapers started referring to it. Then, during the Great Depression, it became a daily requirement. Now, of course, we can follow it every second of the day, which might satisfy that same need. We are still confused and we want to know what the latest scary or hopeful economic news means. So, we look around, and there's still this one thing available. It always has an answer for us, even if the answer doesn't actually mean anything.

Adam Davidson, NPR News.

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MONTAGNE: And you're listening to MORNING EDITION from NPR News. Transcript provided by NPR, Copyright NPR.