Dow Jones Industrial Average

Dow Jones Industrial Average. It is one of the oldest and most widely followed stock market indices in the world, serving as a barometer for the health of the United States industrial sector and broader economy. Created by Charles Dow, co-founder of Dow Jones & Company, and his partner Edward Jones, it originally comprised 12 industrial companies. Today, it tracks 30 prominent, publicly-owned companies based in the United States, though its components have evolved significantly from its purely industrial roots.

History

The index was first calculated on May 26, 1896, by Charles Dow, who also created the Dow Jones Transportation Average. Initially, it included giants of the early industrial age like General Electric, American Cotton Oil Company, and American Sugar Refining Company. A pivotal moment in its history was the Wall Street Crash of 1929, which precipitated the Great Depression. The index was managed for decades by editors of The Wall Street Journal, a publication of Dow Jones & Company. In 2012, S&P Dow Jones Indices, a joint venture majority-owned by S&P Global, took over its management. Significant changes to its composition have occurred over time, such as the replacement of AT&T Corporation with Apple Inc. in 2015, reflecting shifts in the American economy.

Composition and calculation

The selection of the 30 component companies is made by a committee at S&P Dow Jones Indices, with no strict rules, focusing on companies with excellent reputations, sustained growth, and broad investor interest. Notable constituents have included Microsoft, The Boeing Company, Johnson & Johnson, and Visa Inc.. Unlike indices such as the S&P 500 or Nasdaq Composite, which are market-capitalization-weighted, it is a price-weighted average. This means stocks with higher share prices, like UnitedHealth Group, have a greater influence on its movements than those with lower prices, regardless of the company's total market value. This calculation method has remained largely unchanged since its inception, though divisors are adjusted for stock splits and dividends.

Performance and milestones

The index has recorded many historic peaks and troughs, closely tied to major events in American history. It first closed above 1,000 in 1972 and surpassed 10,000 in 1999 during the dot-com bubble. It reached an all-time high above 36,000 in late 2021, fueled by monetary policy from the Federal Reserve and economic recovery from the COVID-19 pandemic. Among its most famous single-day drops are Black Monday in 1987 and the crashes following the September 11 attacks and the 2008 financial crisis. Its long-term trend, however, has been upward, often cited by investors like Warren Buffett as evidence of the resilience of American capitalism.

Criticisms and limitations

Financial analysts and economists frequently critique the index for its narrow scope of only 30 companies, arguing it is not a representative snapshot of the entire U.S. stock market compared to the S&P 500. Its price-weighted methodology is considered anachronistic, as it can distort the index's performance based on arbitrary share prices rather than a company's actual size or importance. Furthermore, its exclusion of major sectors and innovative firms, especially during the rise of Silicon Valley, has been noted. Critics, including Nobel laureate Paul Samuelson, have argued it is more a measure of blue-chip stock sentiment than a precise economic indicator.

Related indices

It is the flagship index within a family maintained by S&P Dow Jones Indices. The Dow Jones Transportation Average, its older sibling, is a key component of the Dow Theory. Other related benchmarks include the Dow Jones Utility Average and the comprehensive Dow Jones Composite Average. For broader market performance, investors often look to the S&P 500, managed by the same organization, or the technology-heavy Nasdaq Composite. Internationally, indices like the FTSE 100, Nikkei 225, and DAX serve similar benchmark roles in their respective markets of the United Kingdom, Japan, and Germany.

Category:Stock market indices Category:Dow Jones indexes Category:1896 establishments in the United States