What is the Dow Jones Industrial Average?

Understanding the Dow Jones Industrial Average

The Dow Jones is the oldest US market index behind the Dow Jones Transportation Average or Dow Transports which was the average of 20 different US traded transportation stocks. Essentially, the Dow Jones purpose was to act as an “alternative” for the health of the US economy and is by far the most tracked index worldwide. To add, although the Dow Jones contains a diverse portfolio of companies they all have secure profits, and all fit within the range of something called “blue-chip”.

Back in 1896 the Dow Jones only consisted of 12 corporations that were based around railroad operations, cotton, gas, oil, and tobacco.

In the early 2000s, many industrial companies like those of which were present on the Dow Jones performed based on the growth of the US economy. This created a relationship between how the Dow performed at the time and subsequently, how the economy performed also at said time. Even to this day, investors see a positively performing Dow Jones as an indicator of a strong US economy and vice versa.

Principally, the economy changes as time goes by, and as it does the configuration of the Dow will shift as well. Essentially, what is meant by this is that in time it is inevitable that certain companies may be excluded from the index as they might no longer be relevant to today’s economy and will, in turn, be dropped for a new company that does reflect the present economy.

Essentially, when companies fall below their standard and begin to lose large margins of their market cap they are prone to being excluded from the Dow. Although, what is market cap? If you didn’t already know market cap, also known as market capitalization, is a method used to quantify the overall value of a given company. This is done by multiplying the number of outstanding shares by the company’s stock price.

Moving on, when a company has a high share price they receive a grander weighting within the Dow. This means that with the onset of high percentage movements for higher valued companies have large influence on the final average calculated. This “average” was originally calculated when Charles Dow added the share prices of the 12 companies currently in the Dow and divided that value by 12. What this equated to is what is called a “simple average”. In time and as financial mathematics developed the calculation became more complicated, accounting for additions and subtractions that were products of mergers and stock splits. When this became reality a basic average calculation average was obsolete in comparison.

The Dow Divisor & Index Calculation

What is the Dow Divisor? Well, the Dow Divisor was a value created to help fix problems regarding the simple average calculation. Fundamentally, the divisor is an encoded constant value which is used when determining the overall effect of a singular point adjustment that any companies within the Dow Jones might have. This Divisor has gone through copious amounts of change in order to keep the Dow accurate and as consistent as possible. The divisor can be found in a multitude of places but According to BARRON’s Market Lab as of March 7^th 2022 the Dow Divisor was 0.15172752595384.

(https://www.barrons.com/market-data/market-lab)

MIGHT WANNA SIGHT THIS WEBSITE TO AVOID COPYRIGHT ON THE DOW DIVISOR VALUE UNLESS YOU WANT TO CALCULATE USING YOUR OWN METHODS

One should note that the Dow Jones does not utilize a weighted arithmetic mean, nor does it signify any of its company’s market cap. Instead the Dow signifies the total price for a single share across all 30 components divided by the current day divisor. Meaning that any singular point adjustments for any of the companies present within the Dow will adjust the Dow itself by an equal value.

The Formula for the Dow Jones Industrial Average is:

Dow Index Components

As aforementioned, the Dow is frequently looked over in order to replace existing companies that do not qualify to be on the Dow anymore with companies that do. As you should know, the current Dow is made up of 30 companies, although, this amount was not reached until 1928. One should also note that the companies/components of the Dow have changed a multitude of times since then.

To add, these changes have occurred several times, in fact, the first replacement was only 3 months after the Dow first converted to the “Dow 30” that we see today. After this many other changes occurred until the Great Depression where many changes occurred all at once. For example, in 1932 eight companies were removed and replaced on the Dow Jones.

Moreover, the largest change that has occurred took place in 1997 when 4 companies where removed and replaced. These 4 included the Westinghouse Electric, Bethlehem Steel, Texaco’s, and Woolworth’s. These 4 were replaced by Travelers Group, Johnson & Johnson, Walmart, and Hewlett-Packard.

Later in 1999 another 4 companies were once again removed and replaced. Those who were removed included Union Carbide, Chevron, Sears, and Goodyear Tire. The 4 that ended up replacing them included Home Depot, Microsoft, Intel, and SBS Communications.

In more “recent” times, Salesforce, Honeywell, and Amgen had been added to the Dow in August of 2020 in replacement of Pfizer, Raytheon Technologies, and ExxonMobil.

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Change Date. Create New Table Format.

Historical Milestones

On March 15^th, 1933 the index’s biggest one-day percentage increase occurred during the bear market of the 1930s. This amounted to around a 15.34% gain totaling to around an increase of 8.26 points closing at 62.10.

Source: https://apnews.com/article/f6db40da1df31668de7413003e31968a

On October 19^th, 1987 the index’s biggest one-day percentage decrease, this took place on what is known to world as Black Monday. This decrease amounted to around a 22.61% decrease.

Source: https://guides.loc.gov/this-month-in-business-history/october/black-monday-stock-market-crash

On September 17^th, 2001 the index’s 4^th biggest single day point decrease at the time occurred immediately after trading resumed proceeding the 9/11 bombings. This decrease amounted to 684.81 or 7%, although, the index itself was decreasing prior to 9/11. In fact, the Dow had decreased upwards of 1,000 points from January and September of 2001. Furthermore, after this decline the Dow began to climb back uphill, recovering for the losses from the attacks and closing well above 10,000 points of the year.

Source: https://www.history.com/this-day-in-history/dow-suffers-largest-single-day-drop-great-recession

On May 3^rd, 2013 the Dow Jones exceeded 15,000 points.

Source: https://www.npr.org/sections/thetwo-way/2013/05/03/180901905/dow-hits-15-000-for-the-first-time-closes-just-shy-of-the-mark

On Jan 25^th, 2017 the Dow Jones exceeded 20,000 points.

Source: https://www.npr.org/2017/01/25/511655832/dow-jones-closes-above-20-000-points-for-first-time-ever

On Jan 4^th, 2018 the Dow Jones exceeded 25,000 points.

Source: https://www.washingtonpost.com/news/business/wp/2018/01/04/the-dow-jones-industrial-average-tops-25000-for-first-time-continuing-its-history-making-rise/

On Jan 17^th, 2018 the Dow Jones exceeded 26,000 points.

Source:https://finance.yahoo.com/quote/%5EDJI/history?period1=1484888400&period2=1520571600&interval=1d&filter=history&frequency=1d

On Feb 5^th, 2018 the Dow Jones declined a whopping 1,175.21 points, in turn, setting a record for the biggest decrease in Dow history.

Source: https://www.marketplace.org/2018/02/05/dow-plunges-1175-points-worst-day-stocks-2011/

Dec 26^th, 2018 the Dow Jones set a record for the largest one day increase at a gain of around 1,086.25 points.

Source: https://www.npr.org/2018/12/26/680119113/after-big-losses-investors-keep-a-look-out-for-santa-claus-rally

July 11^th, 2019 the Dow Jones exceeded 27,000 points.

Source: https://www.pbs.org/newshour/economy/dow-jones-crosses-27000-points-an-all-time-high

Prior to the pandemic, on Feb 12^th, 2020 the Dow Jones reached a high of 29,551 points.

Source: https://www.washingtonpost.com/business/2020/02/28/12-days-that-tanked-markets/

In March of 2020, the Dow Jones crashed with the on setting of the Covid-19 pandemic, crashing below 20,000 points and falling almost 3,000 points in just one day. Big dips occurred like this for a days, some yielding increases, until on March 11^th, 2020 when the Dow Jones became “bear”, officially ending the largest bull market in U.S. history, lasting about 11 years since March of 2009.

Source: https://www.pewresearch.org/fact-tank/2020/03/25/more-than-half-of-u-s-households-have-some-investment-in-the-stock-market/

On November 16^th, 2020 the Dow Jones broke its pre-pandemic high, gaining well over 9000 points back since the crash and reaching 29,950.44 points.

Source: https://www.wsj.com/articles/global-stock-markets-dow-update-11-16-2020-11605515068

On November 24^th, 2020 the Dow Jones broke 30,000 points

Source: https://www.bloomberg.com/news/articles/2020-11-23/asian-stocks-set-for-gains-dollar-yields-rise-markets-wrap

On July 12^th, 2021 the Dow Jones exceeded 35,000 points in a single day, eventually closing above 35,000 points on 2 weeks later on July 23^rd, 2021.

Source: https://www.bloomberg.com/news/articles/2020-11-23/asian-stocks-set-for-gains-dollar-yields-rise-markets-wrap

Limitations of the Dow

Those who oppose the Dow argue that because it only includes 30 large-cap US commodities, it does not reflect the present health or status of the US economy. Contrary to popular belief, they actually insist that 30 commodities is to low and doesn’t take into account enough companies and their different sizes. These same critics also argue that the S&P 500 is more accurate when it comes to representing the US economy as it includes 500 US conglomerates rather than just 30.

In addition to this, those of which that oppose the Dow also think that it is flawed as it uses the share price in the calculation for the average, and that said share price does not precisely represent a company as much as market cap does. This implies that firms with high share prices but low market caps are more significant than companies with low share prices but bigger market caps, demonstrating how the aforementioned connection does not accurately reflect a company’s true size.