Dow Jones Unveils Most Pointless Index of Financial Crisis

First prize for the most useless product invention in the financial crisis goes to Dow Jones.

Dow Jones announced Wednesday that it was unveiling the Economic Stimulus Index, an index of 50 stocks which have a minimum average daily trading volume of $5 million, and which are expected to receive stimulus dollars from this year’s American Recovery and Reinvestment Act.

“The American Recovery and Reinvestment Act represents a significant strategic investment in the U.S. economy and as such is anticipated to have a positive impact on the stock market, which is an indicator of economic health,” said Dow Jones indexes president Michael A. Petronella, in one of those meaningless PR statements you tend to get in press releases.

In other words, the DJ Economic Stimulus Index aims to capture how well bailout recipients are faring among investors. That in turn is supposed to be some sort of indicator of U.S. economic momentum.   

But there are two factors that make this index really redundant, and even dangerous to use.

Firstly, as I discussed yesterday, companies’ capitalizations are more or less irrelevant as a sign of economic growth unless consumer spending is being directed at the products these firms manufacture. Just because there’s a bunch of investors looking to get in on beaten-down share prices, that doesn’t mean that economic conditions in the U.S. are fundamentally getting any better.

For example, higher share prices among banks and automakers says nothing about lending conditions, home foreclosure rates, auto sales or any of the other indicators you would traditionally associate with economic growth.

Instead of tracking share prices, a really useful economic stimulus index would monitor the earnings of the top 50 stocks which are recipients of the bailout funds. Then we’d have a much better idea of how these companies are performing.

But most of all: why does anyone want an index tracking these companies when the stock market is pretty much moving in tandem with their trading patterns these days anyway? Since the stimulus packages were put in place, you could just as easily have glanced at any of the major indexes on pretty much any day and concluded how GM, Bank of America, Citigroup, or Ford are faring.

An index is useful only insofar as it captures the hidden performance of different sectors. For example, a biotech index might be useful because of the sector’s relative lack of correlation to the market overall, and because it tells you what’s happening in a very specific niche of the market.

My advice is to stay away from the stimulus index. It creates more questions than it does answers.