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Kent Thune

13,000: Does the Dow Still Matter?

By February 22, 2012

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When the Dow Jones Industrial Average hit 13,000 during intra-day trading this week, Wall Street cheered for a moment, then took a step back to reflect.  Why should investors really care what the Dow does?

Nothing Attracts a Crowd Like a Crowd

The reason why investors should care is because investors care.  This sounds a bit silly and redundant but investing is largely a herd activity.  If an investor thinks the herd will like something, the investor may naturally have a bias toward that same thing and if an investor thinks the invest fears something, the investor will also likely fear it.  To paraphrase John Maynard Keynes, it's not important to choose who you think is the prettiest girl but who the judges think is the prettiest girl.

In summary, the Dow hit 13,000 this week for a moment then fell because the crowd felt a bit intimidated by this new large number not seen in four years.  Some investors question whether the Dow "still matters" anymore because it only represents 30 large US companies, whereas the S&P 500 Index represents approximately 500.  The Dow does still matter because it is a psychological barometer -- it is something the crowd watches.  Therefore the investor watches it.

The Dow is the pretty girl.

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