> 1) Companies occasionally are changed in the Dow Jones industrial
> average as a result of mergers or other factors. Examples, in 1997,
> Westinghouse, Texaco, Bethlehem Steel and Woolworth, all were dropped.
> Although adjustments are made to the weighting, has anybody ever
> closely examined how the Dow index would have fared if obviously
> lagging companies hadn't been removed?
I don't know of any formal studies, but any stock index is going to have a survivorship bias (as they say in the trade), and this is especially true of the Dow, which comprises only 30 stocks. That's one of the reasons why the S&P 500 is a better index, though inclusion in the S&P attracts buyers from index funds and futures arbitragers, inducing a different kind of distortion.
> 2) Any suggestions on the best indices to track market performance AND
> economic performance? In other words, there's a disconnect between
> market-related indices and how well Joe Sixpack is doing.
You can't do that in one index. If I had to pick a single measure of how Joe (or Jane) Sixpack is doing, I'd say the value of the real hourly wage. I think it's time to update a chart I've run from time to time in LBO - how many hours it'd take the average worker to buy the S&P 500 (i.e., the S&P divided by the average hourly wage). It was at all-time record levels last year; I suspect it's come off a bit since the last time I did it, as the market has pulled back and the wage has risen. Yeah, I think that'll be the chart on the front of LBO #86.
Doug