How do you compare the Dow Jones Industrial Average (DJIA) and the Toronto Stock Exchange (TSX)?

The Dow Jones Industrial Average is an index that tracks performance of the top 30 large companies in the United States. The S&P/TSX Composite is an index tracking the performance of the top companies on the Toronto Stock Exchange in Canada. While it may seem that comparing the two simply means comparing the U.S. market with the Canadian market, the components of each index are actually quite different, move independently and are affected by different stimuli.

The Dow Jones Industrial Average (DJIA) is often quoted as a way to show the health of the U.S. stock market as a whole. Even with only 30 companies included in the calculation, this statistic represents an accurate sample of the broader market. Components of the DJIA include such corporations as Wal-Mart, Johnson & Johnson and General Electric, all leading the U.S. market. Typically, when financial troubles in banking or the money supply occur, these companies experience a devaluation of their stock.

Because the DJIA is a price-weighted index, when the companies' stock prices slide, so does the average reported in the index. Several of the companies included in the index are multinational corporations, making other countries' economies relevant to the fluctuations in the index. For example, in 2013, news of the collapse of banks and near collapse of entire economies in several European countries strained growth on the DJIA, even as domestic companies, in general, enjoyed positive growth.

Just as the DJIA is influenced by macroeconomic factors occurring around the world, the TSX Composite also has similar forces. When Canadian companies are growing, the TSX Composite also experiences growth. However, if problems in the United States occur simultaneously, this growth is likely to be stunted or even reversed. It is nearly impossible for developed markets to limit influence from other countries due to the global economy that exists.

With many companies like Potash Corp involved heavily with commodity markets, the TSX Composite tends to shift for different reasons than the DJIA. Commodities are used and traded around the world, and with a heavier weighting on the TSX Composite than on the DJIA, global commodities' prices are highly correlated to its performance. For example, the TSX Composite consists of a large percentage of energy companies. As the price of oil and natural gas move, so do those energy-producing companies.

Comparing the two indexes is certainly a great way to compare the health of the United States and Canadian markets, but it is important to look at each index's unique qualities to rationalize any differences. For the most part, the DJIA and TSX Composite should move in sync and, when one begins to diverge, a correction is likely to follow, which illustrates the tighter-growing weave of the global economy.

(For related reading, see "An Introduction to Stock Market Indices.")