And does it really reflect the U.S. markets?
Newspapers, radio, and TV news programs refer to the Dow Jones Industrial Average every day, calling it the Dow, or the DJIA. Economists and financial planners pay close attention to daily changes and longer trends. What exactly is the Dow Jones Industrial Average, and why does it matter?
The Dow Jones Industrial Average (“the Dow”) is a stock market index, used to assess movements in the market and its overall strength or weakness. It was created in 1896 by Wall Street Journal editor and co-founder of Dow Jones & Company, Charles Dow. Dow Jones & Company owns the Wall Street Journal.
The Dow tracks the market performance of the same 30 American companies. Initially, the Dow had only 12 stocks. These included such golden oldies as American Cotton Oil Company, U.S. Leather Company, and Distilling & Cattle Feeding Company. In 1920, the Dow expanded to 20 stocks and then to 30 stocks in 1929.
Due to its age, the Dow Jones Industrial Average represents a continuous chart of our nation’s economic growth, along with its ups and downs. The Dow first hit 1000 in late 1972; hit 10,000 in March, 1999; and reached 17,000 in July, 2014. On March 15, 2016, the Dow closed at 17,251.53. As reported by Warren Buffett, in his 2009 Letter to Shareholders of Berkshire Hathaway, the Dow averaged a 5.3% return, compounded annually, for the 20th century.
Comparison to Other Market Indexes
The Dow is the big kid on the index block. It is a blue-chip index, meaning that it is composed only of the top-performing publicly traded companies. These stocks represent well-established, financially stable, very large companies that (purportedly) will provide good returns for investors.
Some market observers argue that broader indexes like the S&P 500 or the Wilshire 5000 are a better way to measure the status of the stock market. Because the Dow has only 30 stocks, they argue, it does poorly in showing the total scope of the market. However, others note that the stocks in the Dow tend to perform similar to the market as a whole because the companies are large and the stocks are frequently traded.
All of the indexes are useful in different ways. Most financial planners follow several different indexes on a daily basis. The Dow contains only the giant companies, the heavyweights of the stock market – stocks that are bought and sold every day, all day long.
Members of the Dow
The Dow has always contained the heavyweights. However, the exact composition of the Dow has changed at various times over the last 120 years, even though most individual stocks stay in the Dow for years. The biggest companies are periodically replaced by even bigger ones.
As the economy moved from heavy industry to consumer goods to technology, the Dow’s membership has changed to reflect the market. Currently, about two-thirds of the Dow are industrial companies, while the other one-third include companies like McDonald’s, Microsoft, and American Express.
General Electric is the only one of the 12 originals remaining in the Index. It was removed from the Dow for 6 months in the 1890s and from 1901-1907, but GE has been a continuous member of the Dow since 1907. Other long-lasting companies include ExxonMobil, which joined the Dow (as Standard Oil of New Jersey) in 1928, Procter & Gamble (1932), and DuPont (1935).
When one company enters the Dow, another has to leave. The most recent change in membership came in March, 2015, when Apple’s entry pushed out AT&T, a continuous member since 1916. Before that, the most recent change saw Goldman Sachs, Nike, and Visa join in September, 2013, while Alcoa, Bank of America, and Hewlett-Packard had to leave.
So, who decides which companies are allowed into the club of 30 companies used for the Dow Jones Industrial Index? Surprisingly, newspaper editors! Dow Jones owns the Wall Street Journal, where Charles Dow was once the editor. As a result, the editorial board of the Wall Street Journal decides who gets into the Dow 30 and who leaves. These changes do not happen very often, however. And yearly company success in the market is hardly the only factor.
2015’s Winners and Losers
The Dow had a poor year in 2015, closing about 400 points lower than it started the year. The best of the 30 stocks, however, all climbed by at least 20%. These winners of the Dow 2015 Competition include:
Nike (up 31%)
McDonald’s (up 30%)
Home Depot (up 29%)
General Electric (up 28%)
Microsoft (up 23%)
The 2015 losers include:
Wal-Mart (down 31%)
Caterpillar (down 25%)
American Express (down 24%)
Chevron (down 20%)
United Technologies (down 16%)
Well, every large, powerful company has good and bad years. These powerful 30 companies come back year after year, some winning and others losing each year. Who will it be in 2016? It’s anyone’s guess.
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