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Dow Jones Industrial Average

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This article is about the stock market index with ticker DJIA. For the company that publishes it, see S&P Dow Jones Indices.
Dow Jones Industrial Average
A historical graph. From its record low of under 35 in the late 1890s to a high reached above 14,000 in mid-2011, the Dow rises periodically through the decades with corrections along the way eventually settling in the mid-10,000 range within the last 10 years.
Historical logarithmic graph of the DJIA from 1896 to 2010.
FoundationFebruary 16, 1885; 139 years ago (1885-02-16) (as DJA)[1]
May 26, 1896 (1896-05-26) (as DJIA)[2]
OperatorS&P Dow Jones Indices
Exchanges
Trading symbol^DJI
Constituents30
TypeLarge cap
Market cap$8.33 trillion (Dec. 2019)[3]
Weighting methodPrice-weighted index
Websiteus.spindices.com/indices/equity/dow-jones-industrial-average

The Dow Jones Industrial Average (DJIA), Dow Jones, or simply the Dow (/ˈdaʊ/), is a stock market index that measures the stock performance of 30 large companies listed on stock exchanges in the United States. Although it is one of the most commonly followed equity indices, many consider the Dow to be an inadequate representation of the overall U.S. stock market compared to broader market indices such as the S&P 500 Index or Russell 3000 because it only includes 30 large cap companies, is not weighted by market capitalization, and does not use a weighted arithmetic mean.[4][5][6][7]

The value of the index is the sum of the price of one share of stock for each component company divided by a factor which changes whenever one of the component stocks has a stock split or stock dividend, so as to generate a consistent value for the index. Since the divisor is currently around 0.1458, the value of the index is 6.859 times larger than the sum of the component prices.

It is the second-oldest U.S. market index after the Dow Jones Transportation Average, created by The Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow. It is the best known of the Dow Averages, of which the first (non-industrial) was originally published on February 16, 1885. The averages are named after Dow and one of his business associates, statistician Edward Jones. The industrial average was first calculated on May 26, 1896.[2]

The Industrial portion of the name is largely historical, as many of the modern 30 components have little or nothing to do with traditional heavy industry. The index is maintained by S&P Dow Jones Indices, a joint venture majority-owned by S&P Global and its components are selected by a committee. The ten components of the index with the highest dividend yields are referred to as the Dogs of the Dow. Although the Dow is compiled to gauge the performance of the industrial sector within the American economy, the index's performance continues to be influenced by not only corporate and economic reports, but also by domestic and foreign political events such as war and terrorism, as well as by natural disasters that could potentially lead to economic harm.

Components

Since April 2, 2019, the Dow Jones Industrial Average has consisted of the following companies:

Company Exchange Symbol Industry Date Added Notes Index Weighting (Mar 25, 2020)
3M NYSE NYSE: MMM Conglomerate 1976-08-09 as Minnesota Mining and Manufacturing 4.34%
American Express NYSE NYSE: AXP Financial services 1982-08-30 2.75%
Apple Inc. NASDAQ AAPL Information technology 2015-03-19 8.08%
Boeing NYSE NYSE: BA Aerospace and defense 1987-03-12 4.18%
Caterpillar Inc. NYSE NYSE: CAT Construction and Mining 1991-05-06 3.31%
Chevron Corporation NYSE NYSE: CVX Petroleum industry 2008-02-19 also 1930-07-18 to 1999-11-01 2.18%
Cisco Systems NASDAQ CSCO Information technology 2009-06-08 1.26%
The Coca-Cola Company NYSE NYSE: KO Food industry 1987-03-12 also 1932-05-26 to 1935-11-20 1.29%
Dow Inc. NYSE NYSE: DOW Chemical industry 2019-04-02 0.93%
ExxonMobil NYSE NYSE: XOM Petroleum industry 1928-10-01 as Standard Oil of New Jersey 1.16%
Goldman Sachs NYSE NYSE: GS Financial services 2013-09-20 5.02%
The Home Depot NYSE NYSE: HD Retailing 1999-11-01 6.04%
IBM NYSE NYSE: IBM Information technology 1979-06-29 also 1932-05-26 to 1939-03-04 3.45%
Intel NASDAQ INTC Information technology 1999-11-01 1.71%
Johnson & Johnson NYSE NYSE: JNJ Pharmaceutical industry 1997-03-17 3.90%
JPMorgan Chase NYSE NYSE: JPM Financial services 1991-05-06 2.89%
McDonald's NYSE NYSE: MCD Food industry 1985-10-30 5.30%
Merck & Co. NYSE NYSE: MRK Pharmaceutical industry 1979-06-29 2.26%
Microsoft NASDAQ MSFT Information technology 1999-11-01 4.85%
Nike NYSE NYSE: NKE Apparel 2013-09-20 2.36%
Pfizer NYSE NYSE: PFE Pharmaceutical industry 2004-04-08 0.97%
Procter & Gamble NYSE NYSE: PG Fast moving consumer goods 1932-05-26 3.38%
Raytheon Technologies NYSE NYSE: RTX Aerospace and defense 1939-03-14 as United Aircraft, later transformed into United Technologies. Merged with Raytheon Company into Raytheon Technologies on April 3, 2020. 2.84%
The Travelers Companies NYSE NYSE: TRV Financial services 2009-06-08 3.07%
UnitedHealth Group NYSE NYSE: UNH Managed health care 2012-09-24 7.19%
Verizon NYSE NYSE: VZ Telecommunication 2004-04-08 1.64%
Visa Inc. NYSE NYSE: V Financial services 2013-09-20 5.05%
Walmart NYSE NYSE: WMT Retailing 1997-03-17 3.76%
Walgreens Boots Alliance NASDAQ WBA Retailing 2018-06-26 1.48%
The Walt Disney Company NYSE NYSE: DIS Broadcasting and entertainment 1991-05-06 3.21%

Former components

Main article: Historical components of the Dow Jones Industrial Average

As of April 6, 2020, the components of the DJIA have changed 54 times since its beginning on May 26, 1896. General Electric had the longest continuous presence on the index, beginning in 1907 and ending in 2018. Changes to the index since 1991 are as follows:

Investment methods

Investing in the DJIA is possible via index funds as well as via derivatives such as option contracts and futures contracts.

Mutual and exchange-traded funds

The easiest way to invest indirectly in the Dow Jones Industrial Average is to buy an index fund which tracks its daily movement. Either a mutual fund or an exchange-traded fund (ETF) can replicate, before fees and expenses, the performance of the index by holding the same stocks as the index, in the same proportions.[29] Some ETFs use leverage or short strategies to magnify price movements.[30]

Futures contracts

In the derivatives market, the CME Group through its subsidiaries the Chicago Mercantile Exchange (CME) and the Chicago Board of Trade (CBOT), issues Futures Contracts; the E-mini Dow ($5) Futures (YM), which track the average and trade on their exchange floors respectively. Trading is typically carried out in an open outcry auction, or over an electronic network such as CME's Globex platform.

Options contracts

The Chicago Board Options Exchange (CBOE) issues option contracts on the Dow through the root symbol DJX. Options on various Dow-underlying ETFs are also available for trading.[31]

Annual returns

The following table shows the annual development of the Dow Jones Index, which was calculated back to 1885.[32][33]

Show / Hide table
Year Closing level Change in Index
in Points 		Change in Index
in %
1885 39.29 10.83 38.05
1886 41.03 1.74 4.43
1887 37.58 −3.45 −8.41
1888 39.39 1.81 4.82
1889 41.56 2.17 5.51
1890 35.68 −5.88 −14.15
1891 41.97 6.29 17.63
1892 39.21 −2.76 6.58
1893 29.57 −9.64 −24.59
1894 29.40 −0.17 −0.57
1895 30.07 0.67 2.28
1896 29.56 −0.51 −1.70
1897 36.07 6.51 22.02
1898 44.18 8.11 22.48
1899 48.24 4.06 9.19
1900 51.62 3.38 7.01
1901 47.13 −4.49 −8.70
1902 46.93 −0.20 −0.42
1903 35.85 −11.08 −23.61
1904 50.82 14.97 41.76
1905 70.23 19.41 38.19
1906 68.88 −1.35 −1.92
1907 42.89 −25.99 −37.73
1908 62.89 20.00 46.63
1909 72.31 9.42 14.98
1910 59.40 −12.91 −17.85
1911 59.63 0.23 0.39
1912 64.15 4.52 7.58
1913 57.51 −6.64 −10.35
1914 54.58 −2.93 −5.09
1915 99.15 44.57 81.66
1916 95.00 −4.15 −4.19
1917 74.38 −20.62 −21.71
1918 82.20 7.82 10.51
1919 107.23 25.03 30.45
1920 71.95 −35.28 −32.90
1921 81.10 9.15 12.72
1922 98.73 17.63 21.74
1923 95.52 −3.21 −3.25
1924 120.51 24.99 26.16
1925 156.66 36.15 30.00
1926 157.20 0.54 0.34
1927 202.40 45.20 28.75
1928 300.00 97.60 48.22
1929 248.48 −51.52 −17.17
1930 164.58 −83.90 −33.77
1931 77.90 −86.68 −52.67
1932 59.93 −17.97 −23.07
1933 99.90 39.97 66.69
1934 104.04 4.14 4.14
1935 144.13 40.09 38.53
1936 179.90 35.77 24.82
1937 120.85 −59.05 −32.82
1938 154.76 33.91 28.06
1939 150.24 −4.52 −2.92
1940 131.13 −19.11 −12.72
1941 110.96 −20.17 −15.38
1942 119.40 8.44 7.61
1943 135.89 16.49 13.81
1944 152.32 16.43 12.09
1945 192.91 40.59 26.65
1946 177.20 −15.71 −8.14
1947 181.16 3.96 2.23
1948 177.30 −3.86 −2.13
1949 200.13 22.83 12.88
1950 235.41 35.28 17.63
1951 269.23 33.82 14.37
1952 291.90 22.67 8.42
1953 280.90 −11.00 −3.77
1954 404.39 123.49 43.96
1955 488.40 84.01 20.77
1956 499.47 11.07 2.27
1957 435.69 −63.78 −12.77
1958 583.65 147.96 33.96
1959 679.36 95.71 16.40
1960 615.89 −63.47 −9.34
1961 731.14 115.25 18.71
1962 652.10 −79.04 −10.81
1963 762.95 110.85 17.00
1964 874.13 111.18 14.57
1965 969.26 95.13 10.88
1966 785.69 −183.57 −18.94
1967 905.11 119.42 15.20
1968 943.75 38.64 4.27
1969 800.36 −143.39 −15.19
1970 838.92 38.56 4.82
1971 890.20 51.28 6.11
1972 1,020.02 129.82 14.58
1973 850.86 −169.16 −16.58
1974 616.24 −234.62 −27.57
1975 852.41 236.17 38.32
1976 1,004.65 152.24 17.86
1977 831.17 −173.48 −17.27
1978 805.01 −26.16 −3.15
1979 838.74 33.73 4.19
1980 963.99 125.25 14.93
1981 875.00 −88.99 −9.23
1982 1,046.54 171.54 19.60
1983 1,258.64 212.10 20.27
1984 1,211.57 −47.07 −3.74
1985 1,546.67 335.10 27.66
1986 1,895.95 349.28 22.58
1987 1,938.83 42.88 2.26
1988 2,168.57 229.74 11.85
1989 2,753.20 584.63 26.96
1990 2,633.66 −119.54 −4.34
1991 3,168.83 535.17 20.32
1992 3,301.11 132.28 4.17
1993 3,754.09 452.98 13.72
1994 3,834.44 80.35 2.14
1995 5,117.12 1,282.68 33.45
1996 6,448.27 1,331.15 26.01
1997 7,908.25 1,459.98 22.64
1998 9,181.43 1,273.18 16.10
1999 11,497.12 2,315.69 25.22
2000 10,786.85 −710.27 −6.18
2001 10,021.50 −765.35 −7.10
2002 8,341.63 −1,679.87 −16.76
2003 10,453.92 2,112.29 25.32
2004 10,783.01 329.09 3.15
2005 10,717.50 −65.51 −0.61
2006 12,463.15 1,745.65 16.29
2007 13,264.82 801.67 6.43
2008 8,776.39 −4,488.43 −33.84
2009 10,428.05 1,651.66 18.82
2010 11,577.51 1,149.46 11.02
2011 12,217.56 640.05 5.53
2012 13,104.14 886.58 7.26
2013 16,576.66 3,472.52 26.50
2014 17,823.07 1,246.41 7.52
2015 17,425.03 −398.04 −2.23
2016 19,762.60 2,337.57 13.42
2017 24,719.22 4,956.62 25.08
2018 23,327.46 −1,391.76 −5.63
2019 28,538.44 5,210.98 22.34

History

See also: Closing milestones of the Dow Jones Industrial Average and List of largest daily changes in the Dow Jones Industrial Average

Precursor

DJIA monthly trading volume in shares from 1929 to 2012

In 1884, Charles Dow composed his first stock average, which contained nine railroads and two industrial companies that appeared in the Customer's Afternoon Letter, a daily two-page financial news bulletin which was the precursor to The Wall Street Journal. On January 2, 1886, the number of stocks represented in what is now the Dow Jones Transportation Average dropped from 14 to 12, as the Central Pacific Railroad and Central Railroad of New Jersey were removed. Though comprising the same number of stocks, this index contained only one of the original twelve industrials that would eventually form Dow's most famous index.[34]

Initial components

Dow calculated his first average purely of industrial stocks on May 26, 1896, creating what is now known as the Dow Jones Industrial Average. None of the original 12 industrials still remain part of the index.[35]

Early years

When it was first published in the mid-1880s, the index stood at a level of 62.76. It reached a peak of 78.38 during the summer of 1890, but ended up hitting its all-time low of 28.48 in the summer of 1896 during the Panic of 1896. Many of the biggest percentage price moves in the Dow occurred early in its history, as the nascent industrial economy matured. In the 1900s, the Dow halted its momentum as it worked its way through two financial crises: the Panic of 1901 and the Panic of 1907. The Dow remained stuck in a range between 53 and 103 points until late 1914. The negativity surrounding the 1906 San Francisco earthquake did little to improve the economic climate; the index broke 100 for the first time in 1906.[38]

At the start of the 1910s, the Panic of 1910–1911 stifled economic growth. On July 30, 1914, as the average stood at a level of 71.42, a decision was made to close down the New York Stock Exchange, and suspend trading for a span of four and a half months. Some historians believe the exchange was closed because of a concern that markets would plunge as a result of panic over the onset of World War I. An alternative explanation is that the United States Secretary of the Treasury, William Gibbs McAdoo, closed the exchange to conserve the U.S. gold stock in order to launch the Federal Reserve System later that year, with enough gold to keep the United States on par with the gold standard. When the markets reopened on December 12, 1914, the index closed at 74.56, a gain of 4.4%. This is frequently reported as a large drop, due to using a later redefinition. Reports from the time say that the day was positive.[39] Following World War I, the United States experienced another economic downturn, the Post–World War I recession. The Dow's performance remained unchanged from the closing value of the previous decade, adding only 8.26%, from 99.05 points at the beginning of 1910, to a level of 107.23 points at the end of 1919.[40]

The Dow experienced a long bull run from 1920 to late 1929 when it rose from 73 to 381 points.[41] In 1928, the components of the Dow were increased to 30 stocks near the economic height of that decade, which was nicknamed the Roaring Twenties. This period downplayed the influence of the Depression of 1920–21 and certain international conflicts such as the Polish–Soviet War, the Irish Civil War, the Turkish War of Independence and the initial phase of the Chinese Civil War. After a peak of 381.17 on September 3, 1929, the bottom of the 1929 crash came just 2 months later on November 13, 1929 at 195.35 intraday, closing slightly higher at 198.69.[42] The Wall Street Crash of 1929 and the ensuing Great Depression over the next several years returned the average to its starting point, almost 90% below its peak. Overall for the 1920s decade, the Dow still ended with a healthy 131.7% gain, from 107.23 to 248.48 points at the end of 1929.[41] In inflation-adjusted numbers, the high of 381.17 on September 3, 1929 was not surpassed until 1954.

Marked by global instability and the Great Depression, the 1930s contended with several consequential European and Asian outbreaks of war, leading up to catastrophic World War II in 1939. Other conflicts during the decade which affected the stock market included the 1936–1939 Spanish Civil War, the 1935–1936 Second Italo-Abyssinian War, the Soviet-Japanese Border War of 1939, and the Second Sino-Japanese War of 1937. The United States experienced the Recession of 1937–1938, which temporarily brought economic recovery to a halt. The largest one-day percentage gain in the index happened in the depths of the 1930s bear market on March 15, 1933, when the Dow gained 15.34% to close at 62.10. However, as a whole throughout the Great Depression, the Dow posted some of its worst performances, for a negative return during most of the 1930s for new and old stock market investors. For the decade, the Dow Jones average was down from 248.48 points at the beginning of 1930, to a stable level of 150.24 points at the end of 1939, a loss of about 40%.[43]

1940s

Post-war reconstruction during the 1940s, along with renewed optimism of peace and prosperity, brought about a 39% surge in the Dow from around the 148 level to 206. The strength in the Dow occurred despite the Recession of 1949 and various global conflicts.

1950s

During the 1950s, the Korean War and the Cold War did not stop the Dow's climb higher. A 200% increase in the average from a level of 206 to 616 ensued over the course of that decade.

1960s

The Dow began to stall during the 1960s but still managed a respectable 30% gain from the 616 level to 800.

1970s

The 1970s marked a time of economic uncertainty and troubled relations between the U.S. and certain Middle-Eastern countries. The 1970s energy crisis was a prelude to a disastrous economic climate along with stagflation, the combination of high unemployment and high inflation. However, on November 14, 1972, the average closed at 1,003.16, above the 1,000 mark for the first time, during a brief relief rally in the midst of a lengthy bear market.[38] Between January 1973 and December 1974, the average lost 48% of its value in what became known as the 1973–1974 stock market crash, closing at 577.60 on December 4, 1974. In 1976, the index reached 1,000 several times and it closed the year at 1,004.75. Although the Vietnam War ended in 1975, new tensions arose towards Iran surrounding the Iranian Revolution in 1979. Performance-wise for the 1970s, the index remained virtually flat, rising less than 5% from about the 800 level to 838.

1980s

The Dow fell 22.61% on Black Monday (1987) from about the 2,500 level to around 1,750. Two days later, it rose 10.15% above the 2,000 level for a mild recovery attempt.

The 1980s began with the early 1980s recession. In early 1981, the index broke above 1,000 several times, but then retreated. After closing above 2,000 in January 1987,[38] the largest one-day percentage drop occurred on Black Monday, October 19, 1987, when the average fell 22.61%. There were no clear reasons given to explain the crash.

On October 13, 1989, the Friday the 13th mini-crash, which initiated the collapse of the junk bond market, resulted in a loss of almost 7% of the index in a single day.[44]

During the 1980s, the Dow increased 228% from 838 level to 2,753; despite the market crashes, Silver Thursday, an early 1980s recession, the 1980s oil glut, the Japanese asset price bubble, and other political distractions. The index had only two negative years in the 1980s: in 1981 and 1984.

1990s

The 1990s brought on rapid advances in technology along with the introduction of the dot-com era. The markets contended with the 1990 oil price shock compounded with the effects of the Early 1990s recession and a brief European situation surrounding Black Wednesday. Certain influential foreign conflicts such as the 1991 Soviet coup d'état attempt which took place as part of the initial stages of the Dissolution of the Soviet Union and the Revolutions of 1989; the First Chechen War and the Second Chechen War, the Gulf War, and the Yugoslav Wars failed to dampen economic enthusiasm surrounding the ongoing Information Age and the "irrational exuberance" (a phrase coined by Alan Greenspan) of the Dot-com bubble. Between late 1992 and early 1993, the Dow staggered through the 3,000 level making only modest gains as the biotechnology sector suffered through the downfall of the Biotech Bubble; as many biotech companies saw their share prices rapidly rise to record levels and then subsequently fall to new all-time lows.

The Dow soared from 2753 to 8000 between January 1990 to July 1997.[38] In October 1997, the events surrounding the 1997 Asian financial crisis plunged the Dow into a 554-point loss to a close of 7,161.15; a retrenchment of 7.18% in what became known as the October 27, 1997 mini-crash.

However, the Dow continued climbing past 9000 despite negativity surrounding the 1998 Russian financial crisis along with the subsequent fallout from the 1998 collapse of Long-Term Capital Management due to bad bets placed on the movement of the Russian ruble.[45]

On March 29, 1999, the average closed at 10,006.78, its first close above 10,000. This prompted a celebration on the trading floor, complete with party hats.[46]. Total gains for the decade exceeded 315%; from the 2,753 level to 11,497, which equates to 12.3% annually.

The Dow averaged a 5.3% return compounded annually for the 20th century, a record Warren Buffett called "a wonderful century"; when he calculated that to achieve that return again, the index would need to close at about 2,000,000 by December 2099.[47]

2000s

The Dow fell 14.3% after the September 11 attacks. Exchanges were closed from September 12 through September 16, 2001.

On September 17, 2001, the first day of trading after the September 11 attacks, the Dow fell 7.1%. However, the Dow began an upward trend shortly after the attacks, and quickly regained all lost ground to close above 10,000 for the year. In 2002, the Dow dropped to a 4-year low of 7286 on September 24, 2002 due to the stock market downturn of 2002 and lingering effects of the dot-com bubble. Overall, while the NASDAQ fell roughly 75% and the S&P 500 fell roughly 50% between 2000 and 2002, the Dow only fell 27% during the same period. In 2003, the Dow held steady within the 7,000 to 9,000-point level and recovered to the 10,000 mark by year end.[citation needed]

The Dow continued climbing and reached a record high of 14,198.10 on October 11, 2007, a mark which was not matched until March 2013.[48] It then dropped for the next year due to the Financial crisis of 2007-2008.

On September 15, 2008, a wider financial crisis became evident when Lehman Brothers filed for bankruptcy along with the economic effect of record high oil prices which had reached almost $150 per barrel two months earlier. The Dow lost more than 500 points for the day, returning to its mid-July lows below 11,000.[49][50] A series of bailout packages, including the Emergency Economic Stabilization Act of 2008, proposed and implemented by the Federal Reserve and United States Department of the Treasury did not prevent further losses. After nearly six months of extreme volatility during which the Dow experienced its largest one-day point loss, largest daily point gain, and largest intraday range (of more than 1,000 points) at the time, the index closed at a new 12-year low of 6,547.05 on March 9, 2009,[51] its lowest close since April 1997. The Dow had lost 20% of its value in only six weeks.

Towards the latter half of 2009, the average rallied towards the 10,000 level amid optimism that the Late-2000s recession, the United States housing bubble and the financial crisis of 2007–2008, were easing and possibly coming to an end. For the decade, the Dow saw a rather substantial pullback for a negative return from 11,497 to 10,428, a loss of a little over 9%.[52]

2010s

A graph that illustrates a trading range from the mid-7,000 level to the 14,000 level aside from a low in the mid-6,000 level in early 2009. The average traded at or near the 10,000 range for most of the 2000s decade.
The Dow from January 2000 through February 2015.

During the first half of the 2010s decade, aided by the Federal Reserve's loose monetary policy including quantitative easing, the Dow made a notable rally attempt. This was despite significant volatility due to growing global concerns such as the 2010 European sovereign debt crisis, the Dubai World 2009 debt standstill, and the United States debt-ceiling crisis of 2011.[citation needed]

On May 6, 2010, the Dow lost 9.2% intra-day and regained nearly all of it within a single hour. This event, which became known as the 2010 Flash Crash, sparked new regulations to prevent future incidents.[53]

Six years after its previous high in 2007, the Dow finally closed at a new record high on March 5, 2013.[54] It continued rising for the next several years past 17,000 points until a brief 2015–16 stock market selloff in the second half of 2015.[55] It then picked up again early 2016 and climbed past 25,000 points on January 4, 2018.[56]

Volatility returned in 2018 when the Dow fell nearly 20%.[57][58][59] By early January 2019, the index had quickly rallied more than 10% from its Christmas Eve low.[60]

Overall in the 2010s decade, the Dow increased from 10,428 to 28,538 points for a substantial gain of 174%.[61]

2020s

Despite the emerging coronavirus pandemic, the Dow continued its bull run from the previous decade before peaking at 29,551.42 on February 12, 2020 (29,568.57 intraday on the same day). The index slowly retreats for the remainder of the week and into next week, before coronavirus fears and an oil price war between Saudi Arabia and Russia sent the index into a tailspin, recording several days of losses[62] (and gains[63]) of at least 1,000 points, a typical symptom of a bear market[64] as previously seen in October 2008 during the financial crisis. Volatility rose high enough to trigger multiple 15-minute trading halts.[65] In the first quarter of 2020, the DJI fell 23%, its worst quarter since 1987.[66]

Calculation

To calculate the DJIA, the sum of the prices of all 30 stocks is divided by a divisor, the Dow Divisor. The divisor is adjusted in case of stock splits, spinoffs or similar structural changes, to ensure that such events do not in themselves alter the numerical value of the DJIA. Early on, the initial divisor was composed of the original number of component companies; this initially made the DJIA a simple arithmetic average. The present divisor, after many adjustments, is less than one (meaning the index is larger than the sum of the prices of the components). That is:

where p are the prices of the component stocks and d is the Dow Divisor.

Events such as stock splits or changes in the list of the companies composing the index alter the sum of the component prices. In these cases, in order to avoid discontinuity in the index, the Dow Divisor is updated so that the quotations right before and after the event coincide:

The Dow Divisor was 0.14579812049809 on April 6, 2020[67] and every $1 change in price in a particular stock within the average equates to a 6.8588 (or 1 ÷ 0.14579812049809) point movement.

Assessment

Issues with market representation

With the inclusion of only 30 stocks, critics such as Ric Edelman argue that the DJIA is an inaccurate representation of overall market performance compared to more comprehensive indexes such as the S&P 500 Index or the Russell 3000 Index. Additionally, the DJIA is criticized for being a price-weighted index, which gives higher-priced stocks more influence over the average than their lower-priced counterparts, but takes no account of the relative industry size or market capitalization of the components. For example, a $1 increase in a lower-priced stock can be negated by a $1 decrease in a much higher-priced stock, even though the lower-priced stock experienced a larger percentage change. In addition, a $1 move in the smallest component of the DJIA has the same effect as a $1 move in the largest component of the average. For example, during September–October 2008, former component AIG's reverse split-adjusted stock price collapsed from $22.76 on September 8 to $1.35 on October 27; contributing to a roughly 3,000-point drop in the index.[68]

As of March 2020, Apple and UnitedHealth Group are among the highest priced stocks in the average and therefore have the greatest influence on it. Alternately, Pfizer and Dow Inc. are among the lowest priced stocks in the average and have the least amount of sway in the price movement.[69] Critics of the DJIA and most securities professionals recommend the market-capitalization weighted S&P 500 Index or the Wilshire 5000, the latter of which includes most publicly listed U.S. stocks, as better indicators of the U.S. stock market.

Correlation among components

A study between the correlation of components of the Dow Jones Industrial Average compared with the movement of the index finds that the correlation is higher when the stocks are declining. The correlation is lowest in a time when the average is flat or rises a modest amount.[70]

See also

References

  1. ^ "Dow Record Book Adds Another First". Philly.com. February 24, 1995. Archived from the original on October 4, 2013.
  2. ^ a b Judge, Ben (May 26, 2015). "26 May 1896: Charles Dow launches the Dow Jones Industrial Average". MoneyWeek.
  3. ^ "Dow Jones (DJIA) Historical Total Market Cap".
  4. ^ "Standard & Poor's 500 Index – S&P 500". Investopedia.
  5. ^ Deporre, James (September 7, 2018). "Ignore the Misleading Dow Jones Industrial Average". TheStreet.com.
  6. ^ Floyd, David (June 25, 2019). "Discover What Makes the Dow Jones Industrial Average Stupid". Investopedia.
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