If you invest or pay attention to the news, you have undoubtedly heard about “the Dow Jones” or “the Dow.”
Yet, few investors have a strong understanding of what the Dow Jones Industrial Average (DJIA) actually is (like that it is the same thing as “the Dow”) or how it began.
In this article, we are going to explain “the Dow Jones” because, after all, you should never invest in a business that you don’t understand. Warren Buffett says so. We would add that you also shouldn’t follow the performance of an index that you don’t comprehend.
Let’s start with the basics.
What is the Dow Jones Industrial Average?
The DJIA is a stock market index. It tracks the movements of thirty publicly traded companies – for this reason, it is sometimes called the Dow 30. Collectively, these are some of the biggest, most prominent companies in the United States.
If they do well as a whole, the DJIA goes up. If they all lose money, say in a recession, the Dow falls.
If it is a mixed bag with some companies doing well and others slipping a little, the DJIA pretty well remains level. The assumption is that smaller companies and those not included in the Dow will experience similar stock movements. In this way, the DJIA is taken as an expression of how the economy is doing.
The price of the Dow is quoted like a stock price. You will see a value and beside that a percentage. This percentage represents how the Dow has changed since market open.
However, the Dow is not a dollar amount. It is simply a value that is calculated via the total sum of the share prices of the stocks included in the index that is divided by the Dow Divisor (more on that later).
When Did the Dow Jones Industrial Average Begin?
The Dow was founded in 1896 by Charles Dow. He was one half of Dow & Jones company as well as the editor of the Wall Street Journal.
Edward Jones also played a role. The DJIA was actually the second index that Charles Dow created. The first was the Dow Jones Transportation Average (DJTA). It came out two years before the DJIA.
At the time of its creation, the DJIA included 12 companies and they mostly came from the big industry – oil, railroads, sugar, and tobacco amongst others. Basically, these were the blue-chip stocks of the day. The original companies of the DJIA included:
· American Tobacco
· American Sugar
· American Cotton Oil
· Chicago Gas
· General Electric
· Distilling and Cattle Feeding
· Laclede Gas
· National Lead
· North American
· Tennessee Coal, Iron, and Railroad
· U.S. Rubber
· U.S. Leather
Dow created the index so that it was weighted by price. The value of the index was originally calculated as the total of the stocks divided by 12 – an average of the stock prices of those companies on the list.
That said, the way the DJIA is calculated has changed a lot over the years. Today, it includes 30 companies and it is no longer reported as an average of the total share prices of the stocks divided by the number of stocks included in the index.
Instead, the total sum of the share prices of the companies on the list are divided by the Dow Divisor. This figure is meant to represent the impact of dividends, stock splits, and other specifics to the stocks included in the Dow.
What is the Highest the Dow Jones Industrial Average Has Ever Been in History?
The highest value the Dow Jones Industrial Average has ever reached was 29,373 on January 17, 2020 but it came within 100 points of that figure on February 5, 2020.
What’s the Highest the Dow Jones Has Been in 2020?
The Dow Jones reached its highest level of 29,373 on January 17, 2020.
What are the Current Dow Jones Industrial Average Components?
The DJIA does not have rules for which companies can be included other than that it must be listed on a major domestic stock index.
Today’s Dow includes stocks from a variety of sectors, including technology, finance, and consumer goods.
The current DJIA includes the following companies:
· DowDuPont Inc (DOW)
· Goldman Sachs (GS)
· Intel (INTC)
· Johnson & Johnson (JNJ)
· Microsoft (MSFT)
· Nike (NKE)
· Procter & Gamble (PG)
· Travelers Companies Inc (TRV)
· United Technologies (UTX)
· UnitedHealth (UNH)
· Verizon (VZ)
· Visa (V)
· Walmart (WMT)
The Dow changes depending on several factors. Generally, to be included, a stock must account for a large portion of the economy and be important in its sector. However, changes do not happen often. Recent changes include:
– 2018: Walgreens replaced General Electric
– 2015: Apple took AT&T’s spot
Why is the Dow Jones Industrial Average Important?
The Dow Jones Industrial Average is a rough overview of the economy – very rough. While only thirty stocks are included, together they paint a picture about the health of the economy in the United States.
When the economy is strong, the Dow is on an upswing. When the economy is rough, the Dow tends to decline proportionately.
As a result, the Dow is often cited and consulted when talking about the financial health of the US. It may not be the only number reported, but it is a popular measure.
The Dow may not be the most comprehensive measure of the economy, but it is a convenient measure to consult.
We love the DJIA because it is convenient, and it does give you an overarching idea of what is happening to the economy as a whole.
When major corporations start to lose money across the board, being more conservative as an investor is not a bad strategy.
Further, when all the companies in the Dow are growing, it could be that the economy is strong. When the tides will shift depends on whether you are a bull (e.g. let’s ride this wave) or a bear (e.g., the market is going to crash, short everything), but you may be able to have a better idea of the direction of the economy by looking at the Dow.
That said, always take the DJIA with a grain of salt.
Criticisms of the Dow Jones Industrial Average
It isn’t exactly representative of the whole of the economy the way it once was. The number of publicly traded companies is simply too vast.
The actual sizes of the companies on the list never figures in either – just the share price. A company with comparatively few shares and a large share price counts more than a company with a high number of shares and a lower stock price.
Further, the index is weighted by price instead of market. This means that a company with a higher share price could unfairly influence the direction or value of the Dow – even if that company has less true influence on the economy at-large.
Other indices tend to give a more representative picture, so most fund managers and investors prefer to look at them. The S&P 500 is a good example.
Interconnectivity is an issue as well. The world is getting smaller and large corporations are playing in several different sandboxes. Many of the companies on the Dow make the majority of their profits in other countries. Shareholders may see the benefit of their successes, but the average US citizen will never be the wiser.
Finally, there is a bigger issue – inflation. When anyone reports the value of the Dow, they just state the price, but that is not fair. This simple math would be like saying that $100 was the same in 1900 as it was in 2000 – never mind that $100 in 1900 would have paid the rent on a three-room dwelling for ten years and in 2000, that same dollar amount would barely rent you a car for a weekend.
Should You Care About the DJIA?
As an investor, the Dow Jones Industrial Average matters. Not because it is terribly accurate or insightful, but because other people consult it. The same way that a stock is only worth what someone is willing to pay for it, the value of the Dow matters because other people may use it in their calculations of value.
While analysts mostly use other indices in their calculations, many people opine on the state of the economy and a good number of them consult or cite the Dow without every understanding what the Dow is or why it matters.
If the stock market or a share price moves on the word of someone who follows the Dow, you are impacted so it is good to pay attention to how the DJIA is moving.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.