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Dow Jones Industrial Average vs. S&P 500 Composite Index

Pub: 09.09.15

| By Anonymous

In Finance.

Tags: dow jones s&p 500 index analysis correlation .

"The S&P 500 is Wall Street's indicator. Main Street's indicator is the Dow." is an interesting statement. The article outlines some of the key differences: the Dow tracks 30 stocks, the S&P tracks 500. The Dow is weighted by price (wat?!), the S&P is with market capitalization.

You can read more about the Dow Jones Industrial Average index and the Standard & Poor's 500 on Wikipedia.

The total return indices of the Dow and the S&P look like this when rebased and plotted on the same figure:

DJ and SP index return values

The performance of the indices is pretty similar. The Dow has a slightly higher average return than the S&P 500 over the sample period from January 1988 to December 2014.

DJ and SP summary statistics

The correlations over time of the two indices are fairly high. Why at some points in time do they drift more apart? Lately they have been especially stable.

DJ and SP correlation over time

Are you concerned that the above limited indices do not track the whole market? Well then you can take a look at a broad market index like the Willshire 5000, the Russell 3000. If you are doing research, the CRSP value-weighted index is probably your correct choice.

All of the indices look pretty much the same, even though their summary statistics are slightly different:

Multiple index returns

All of the indices are highly correlated with each other:

Multiple index correlations

What does it mean to be an indicator for the market? Does it matter where traders "flock" to? Don't all the indices pretty much measure the same thing?

I would argue that it doesn't matter what you use. As long as you are aware of the potential caveats. They are all correlated and show pretty much the same thing.