Dow Jones average closes at a record high

Specialist Meric Greenbaum works on the floor of the New York Stock Exchange.
Specialist Meric Greenbaum works on the floor of the New York Stock Exchange.

NEW YORK (AP) - The stock market reached another milestone Tuesday as the Dow Jones industrial average closed at a record high.

A day earlier, the broader Standard & Poor's 500, a widely used benchmark for index funds, also reached a record-high close. Both indexes beat peaks set in May 2015.

The Dow, which is made up of just 30 stocks, is an older and better-known barometer of the market than the S&P 500, but professional investors generally pay much closer attention to the S&P 500.

The Dow rose 120.74 points, or 0.7 percent, to 18,347.67. That is 35 points higher than its previous closing high set on May 19 last year.

The S&P 500 gained 14.98 points, or 0.7 percent, to 2,152.14. The Nasdaq composite rose 34.18 points, or 0.7 percent, to 5,022.82.

The Nasdaq is still lagging the other two main U.S. stock market indexes. The index, which is heavily weighted with technology and biotech stocks, erased its losses for the year on Tuesday.

The Dow and S&P 500 are each up 5.3 percent for 2016, having roared back following a big drop in January and early February. The S&P has soared 17.7 percent since reaching a low of the year of 1,829 on Feb. 11.

 

What it means

Here is a look at the widely watched gauge, its venerable history stretching back over a century and why we still care about it after all these years.

What is the Dow?

The index comprises 30 big company stocks chosen to represent a broad selection of industries. Its members include banks like Goldman Sachs and JPMorgan Chase, industrial giants like Caterpillar, the ubiquitous Apple, and media giant Walt Disney Co.

Its membership changes. When the predecessor to the Dow was first published on May 26, 1896, it included 12 businesses now long gone from the index, and in some cases memory. When was the last time you thought about American Cotton Oil or Laclede Gas Light Co.?

General Electric Co. is the only remaining original member. The industrial giant dropped out of the average for brief spells but returned for good in 1907.

How big is the new record?

In relative terms, not much: It's just two-tenths of a percentage point above its previous all-time high.

And judging from recent history, it's taken its time. The last record was on May 19, 2015, 14 months ago. In the six months leading up to that date, the index hit a record 10 times.

How does the dow differ
from the S&P 500?

Whereas the Dow is made up of just 30 stocks, the Standard and Poor's comprises 500.

The two also differ in how they value each stock in their indexes. The Dow is price-weighted, which means the rise or fall of a single dollar in each of its 30 stocks has the same impact on the index.

That might sound fair, but the practical effect is that the index moves up and down regardless of whether the same dollar change in the price of two stocks represents a big or small percentage change for investors.

That's odd. After all, a $1 move in Cisco Systems, which traded Tuesday at $29.61, means a lot more to investors than a $1 move in 3M shares, which closed at $179.16.

By contrast, the S&P 500 is market weighted. Companies with biggest overall value on the stock market - their stock price multiplied by all their shares - have the biggest impact moving the index. Apple, the world's most valuable publicly traded company at $531 billion, moves that index more than any other member.

Why doesn't the Dow record
matter for my portfolio?

Most index funds, a favorite of investors, are pegged to the S&P 500, not the Dow. Just more than $2.1 trillion in index funds was tied to the S&P 500 at the end of last year, according to S&P Dow Jones Indices. That's nearly 60 times more than the $36 billion in index funds tied to the Dow.

Actively managed funds also tend to track the S&P 500: Another $5.4 trillion in assets is benchmarked against that index.