Until recently, the Dow-S&P fight was strictly inside baseball, to mix sports metaphors. The public used the 30-stock Dow as a shorthand for the stock market; money managers used the more broadly based 500-stock S&P as a benchmark to measure investment performance. When it came to investing, there was no competition: S&P has been licensing its indexes for mutual funds and other investment products for about 20 years, while Dow Jones, owner of The Wall Street Journal, wouldn’t license its Dow averages, lest it sully its image.
But two things happened. First, index investing–mimicking an index rather than trying to outperform it–became a mania a few years ago, dramatically raising the stakes. And in late 1997, a suddenly hungry Dow Jones decided to boost profits by licensing its averages, giving the S&P 500 its first serious licensing competitor. So lots of people pay attention to the fact that in 1998, the S&P 500 outperformed the 30-stock Dow by a stunning 10.6 percentage points, 26.7 to 16.1, the second biggest gap since head-to-head competition started 76 years ago. For the past two years the S&P rose a total of 57.7 percent, 19 more than the Dow, matching the biggest two-year gap in history, according to data from Birinyi Associates.
The more your indicator rises compared with its rival, the hotter an investment product it becomes. Or so the thinking goes. Which explains why S&P is trash-talking and taking victory laps about how its index has outperformed the Dow for the past two years. ““The Dow owns a substantial short position in the growth segment of the American economy’’ because it’s underweighted in technology stocks, says Jim Branscome, the senior vice president in charge of the committee that picks stocks for the S&P 500. Responds John Prestbo, who supervises the Dow average: ““Over history, some years the S&P beats the Dow, sometimes the Dow beats the S&P. I don’t think it makes much difference.''
I could explain to you in detail why the Dow and the S&P, which normally turn in similar performances, have diverged so much recently. But I don’t want to burden you with a math lesson. Suffice it to say that the S&P gives much more weight to big tech stocks than the Dow does. And those stocks drove the market last year.
While S&P components change frequently–almost 50 changes in 1998–the Dow changes only every few years. This lets the S&P keep up with the market more easily than the Dow can. For instance, on Dec. 31 S&P kicked out Venator, the struggling remnant of what used to be Woolworth, and added America Online, one of the market’s hottest stocks. It sure looks to me that S&P swapped Venator for AOL to juice up its index. Branscome denies this: ““The [index] committee thought we needed a representative stock in the Internet segment,’’ he says, and Venator ““isn’t the same company it was when we put it in the index.''
S&P, of course, would like us to think that the S&P 500 will continue to outperform the Dow. But as recently as 1996 the Dow outperformed the S&P, 26.0 to 20.3. And back in 1979-80, S&P way outperformed the Dow, 38.1 to 19.1. Laszlo Birinyi says that was because so-called domestic oil companies, whose business is mostly in the Unit- ed States, were hot because of oil-price run-ups, and the Dow didn’t have any domestic oils. If companies like GM and Caterpillar do well in 1999 and technology stocks cool off, the Dow could well outperform the S&P this year.
Birinyi thinks that Dow vs. S&P is one of those cyclical things that are interesting at the time but don’t mean much in the long run. He likens obsessing over Dow-S&P to the old chestnut that an American Football Conference team’s winning the Super Bowl presages a bad year for stocks. ““It’s like the Super Bowl indicator,’’ he says. ““It gives people who don’t want to work at year-end something to write about.’’ To which I can only say, amen.
