It’s an old adage that “What gets measured, gets managed.” I’d like to add, “what gets managed, gets manipulated.”
That adage is usually used to discuss how people are paid. If you pay a bonus based on quarterly results, some people will manipulate the timing of sales to generate low-quality sales so they can get a bonus.
Broader economic measures have a tremendous effect, too. When the political party in power cries, “The economy is doing well/poorly,” they usually are referring to a very, very narrow set of financial measures. Generally “the stock market,” which translates into the Dow Jones Industrial Average, or the S&P 500, or aggregate corporate profits of public companies. Economic news virtually never includes any measure of well-being of individuals, so it’s not too surprising that an economic-indicator-based measurement system will give the well-being of companies a lot of weight.
GE was just booted from the DJIA
I’m genuinely puzzled. GE has been removed from the Dow Jones. This matters because inclusion in an index boosts a stock, since index funds all buy the stocks that are in an index. So GE will lose that boost. But also, it will change the actual DJIA (Dow Jones Industrial Average).
The article says, “The committee that runs the Dow prefers no more than a 10-to-1 ratio between the high and low stocks in the index.”
If something purports to be a measurement, as the Dow Jones Industrial Average purports, it seems like establishing price standards is, you know, simply manipulating that measurement to get the numbers you want.
Yes, the article says that GE had little impact on the DJIA, because its stock price was so low … but isn’t that the point? It had a low stock price, and that price should affect the average as much as the high prices affect the average.
They also say that GE doesn’t represent the economy any more. That argument makes more sense. If you’re purporting to measure the economy, then changing the mix based on the economy, makes sense. I can buy into to some degree, but manufacturing DOES still exist in the US, and wouldn’t GE be our most significant representative of that sector?
What is “the economy?”
How do they decide what “represents the economy.”
Is it simply who has the most money? If so, trash the whole index of companies and simply replace it with today’s measure of the wealth of the top 10 people in the Forbes 500, or the top 10 institutions that hold the most equities.
Since the purpose of the economy is to create jobs and lift up the country as a whole, perhaps the DJIA should more heavily weight the companies according to the number of full-time, individual living-wage jobs they provide for the economy?
Or perhaps the DJIA should contain only companies that have never been involved in scandals, since surely we don’t want our economic measures to reward bad actors.
If, as the article states, the financial sector are considered one of the major (if not the major) sectors of the economy, then the financial measures they use will have broad implications for us all. If the DJIA no longer contains GE, that will certainly alter a great many actions somewhere, on some plate.
We just won’t know whose, and whether those actions are bad for the economy, or whether they give us some kind of boost. The one thing we can be fairly sure of: when you change what gets measured, you will change what gets managed.
http://money.cnn.com/2018/06/19/investing/ge-dow-jones-walgreens/index.html
