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IU STOCK MARKET EXPERT SHARES VIEWS
ABOUT DOW JONES AVERAGE HITTING 10,000
On March 16, the Dow Jones Industrial Average reached five figures -- or the 10,000 mark -- for the first time in history. Here are some comments from Robert Klemkosky, the Fred T. Greene Professor of Finance in Indiana University's Kelley School of Business. Klemkosky also is director of IU's MBA Investment Management Academy, a program that prepares second-year MBA students for careers on Wall Street. Under his direction, the students manage a stock portfolio that is valued at more than $450,000. Klemkosky can be reached at 812-855-3422.
Klemkosky dismissed the significance of the Dow milestone: "The Dow is an old stock market indicator, and it's a popular one because it has the backing of Dow Jones. Back in the days before computers, it was about all you had. But it's not the index that professionals use. A couple of days ago, the Standard and Poor's index went above 1.300 for the first time and you didn't hear a word about it, but it was a bigger event to the people who manage money than the Dow going over 10,000."
"The Dow is made up of 30 blue chip stocks and it's a little light on technology (stocks). If it kept up with the NASDAQ Index, it would be at 13,000 now," Klemkosky said. "Most investors don't know how the Dow is constructed. Because of stock splits and stock dividends, the divisor on the average has gotten extremely small. Basically what that means is that if every stock in the Dow went up by a dollar, the Dow Jones Industrial Average would go up by 133 points. People might say that's a big day, but it just means that every stock has gone up, on average, by a dollar."
On how Wall Street will react, Klemkosky said, "They'll whoop and holler down on the floor of the New York Stock Exchange ... just because this thing has been around since 1896. But it highlights 30 stocks on just one exchange. Certainly, if the Dow falls 20 percent, no stock is going to buck that -- they're all going to fall. From July 17 to Oct. 8 last year, the Dow and the S&P both fell by 19.3 percent, whereas the average stock in the New York Stock Exchange was down by 40 percent. It was not reflected in the index. That's because the larger stocks held up much better than the average stock did. The same thing could happen here -- we hit 10,000 and that may bring out a lot of psychological selling, which some people surmise will happen. However, remember that 20 percent of the selling of the New York Stock Exchange is by individuals and 80 percent is by institutions, and the institutions do not use the Dow as a benchmark."
On the continued importance of the New York Stock Exchange vs. other major exchanges, he said, "You add up all the value of the stocks in the world and half of it is in the United States. The New York Stock Exchange is still the dominant exchange, in terms of the value of what is listed on the exchange and what is traded there. NASDAQ has come up tremendously -- you'll notice on many days that NASDAQ volume exceeds the New York Stock Exchange volume. But they kind of double count, because when you deal with NASDAQ, you always deal with a dealer who buys your stock and then sells it to someone else and counts it again. Whereas with the New York Stock Exchange, the buyer and seller get together and by-pass the dealer, trade it among themselves, and count it as one trade. Obviously, there are five big stocks on NASDAQ that the New York Stock Exchange would love to have."
Looking forward from the 10,000-point milestone, Klemkosky said the New York Stock Exchange does not face a serious challenge from other major or smaller regional exchanges, but rather from electronic communication networks (ECMs). "They are a threat to NASDAQ, too. The Securities and Exchange Commission two months ago said ECMs could be registered as exchanges. So maybe 25 percent of trading in NASDAQ stocks goes to these ECMs, and the New York Stock Exchange says that in a couple of weeks they may start one themselves, to trade NASDAQ stocks."