The Most Useless Index of the Financial Crisis

Daniel M. Harrison awards the honor of most useless index of the financial crisis to Dow Jones and their Economic Stimulus Index:

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.

Read the whole thing.
Update: S&P has upped the competition. They have a new index that follows companies that adhere to Sharia Islamic law. In other words, no alcohol, pork or tobacco. Best of all…it’s Canadian!

Posted by on May 28th, 2009 at 9:03 am


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