Q&A: What the Dow numbers really mean

The Dow Jones Industrial Average crossed the 13,000 mark Tuesday for first time in nearly four years, helped by a backdrop of strong corporate earnings, a new Greek bailout deal and a stream of better-than-expected U.S. economic news.

The milestone came about two hours into the trading day. The Dow was above 13,000 for about 30 seconds, and for slightly longer at about noon and 1:30 p.m., but couldn't hold its gains. It finished up 15.82 points at 12,965.69.

To put Dow 13,000 in perspective, here's a quick primer on the Dow Jones Industrial Average, what the latest trading action means, and why it matters.

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Q: What is the Dow?

A: The Dow is an average of just 30 stocks selected by the editors of the index. It's become a sort of shorthand for U.S. market performance because it's the oldest average, going back to 1896, and consists entirely of large, well-known, blue-chip companies. However, the S&P 500 is the most commonly used benchmark for U.S. equity performance, not the Dow. When professionals talk about "the market," they're referring to the S&P 500, which represents about 75 percent of the total value of the U.S. stock market. The Dow represents roughly 25 percent to 30 percent of the market.

Q: When did the Dow last close above 13,000?

A: The Dow hasn't closed above 13,000 since May 19, 2008, when unemployment stood at 5.4 percent, Lehman Brothers was still solvent and the financial crisis and Great Recession were still unthinkable. The average fell as low as 6,547 on March 9, 2009. A reading of 13,094 would double that. The Dow is currently up 98 percent from its bear-market closing low.

Q: Does Dow 13,000 mean stocks are poised for more gains?

A: Not necessarily. Dow 13,000 is a psychologically important milestone -- but it has no technical implications that will affect the behavior of professional investors. Traders on the floor of the New York Stock Exchange (NYX) gave out a quick "whoop" when the Dow hit 13,000, reports CBS News correspondent Alexis Christoforous, but then quickly -- and quietly -- went back to work. Dow 13,000 matters more to small retail investors, who may become more confident in stocks after getting badly burned twice in the last decade. The allure of rising prices usually draws more money into any market -- from housing to Dutch tulip bulbs -- which isn't necessarily a good thing.

Q: Is the Dow a good benchmark for the economy?

A: Not in the short term, but over long periods of time the Dow has correlated fairly well with GDP, as well as the broader S&P 500. The Dow is a quirky index. Unlike almost any other, it's weighted by share price rather than market cap. That means a small percentage change in the stock of IBM (IBM), which is trading around $193, sways the index much more than a large change in the stock of Bank of America (BAC), which is trading around $8. Last year, the Dow rose 5.5 percent. But strip out IBM and McDonald's (MCD), the two stocks with the highest prices last year, and it rose just 1.8 percent, according to calculations by Birinyi Associates.

Q: How much more would the Dow need to rise to regain its all-time high?

A: The Dow notched a record closing high of 14,165 on Oct. 9, 2007. The blue-chip index would need to add another 1,200 points, or 9 percent, to match is all-time closing high. Adjusted for inflation, however, the Dow's all-time high is actually 15,485, meaning it would need to add more than 2,500 points, or nearly 20 percent, to get back to real record levels. Additionally, as MoneyWatch blogger Allan Roth reports, the market is a hair away from crossing a more significant, but less noticed, milestone: If you look at the entire market, rather than just the 30 stocks in the Dow, U.S. stocks have recovered within one percent of their all-time high, reached on Oct. 9, 2007.

The Associated Press contributed to this report.

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    Dan Burrows, a veteran of Aol's DailyFinance, SmartMoney and MarketWatch from Dow Jones, covers the markets and economy with an eye toward investing for the long haul.

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