The Dow Jones Industrial Average
One of the biggest Stock Market is the United States is the Dow Jones, aside from the NASDAQ. The Dow Jones Industrial Average or the Dow Jones index or the Dow, is one of several stock market indices created by Wall Street Journal editor and Dow Jones & Company founder Charles Dow. Dow compiled the index as a way to gauge the performance of the industrial component of America’s stock markets. It is the oldest continuing U.S. market index.
The Stock market, average consists of 30 of the largest and most widely held public companies in the United States. The “industrial” portion of the name is largely historical ” many of the 30 modern components have little to do with heavy industry. To compensate for the effects of stock splits and other adjustments, it is currently a scaled average, not the actual average of the prices of its component stocks ” the actual average of prices is multiplied by a scale factor, which changes over time, to generate the value of the index.
The Early Period of the Dow:
First published on May 26, 1896, the DJIA represented the average of twelve stocks from various important American industries. Of those original twelve, only General Electric remains part of the average. The other eleven were:
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American Cotton Oil Company, now part of Unilever
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American Sugar Company, now Amstar Holdings
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American Tobacco Company, broken up in 1911
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Chicago Gas Company, (now Peoples Energy Corporation)
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Distilling & Cattle Feeding Co., now Millennium Chemicals
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Laclede Gas Light Company, now The Laclede Group
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National Lead Company, now NL Industries
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North American Company, (Edison) electric co in the 1950s
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Tennessee Coal Iron & Railroad Co, bought by US Steel 1907
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U.S. Leather Company, dissolved 1952
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U.S. Rubber Company, bought by Michelin in 1990
When the Dow Jones was first published, the index stood at 40.94. It was computed as a direct average, by first adding up stock prices of its components and dividing by the number of stocks. Many of the biggest percentage price moves in the Dow occurred early in its history, as the nascent industrial economy matured.
The index hit its all-time low of 28.48 during the summer of 1896.
The largest one-day percentage drop in the history of the Dow occurred on December 12, 1914, 24.39%, after a multi-month NYSE hiatus brought on by World War I.
In 1916, the number of stocks in the DJIA was increased to twenty, and finally to thirty in 1928, near the height of the “roaring 1920s” bull market. The crash of 1929 and the ensuing Great Depression returned the average to its starting point, almost 90% below its peak, by July 8, 1932. The highs of September 3, 1929 would not be surpassed until 1954.
The largest one-day percentage gain in the index, 14.87%, happened on October 6, 1931, in the depths of the 1930s bear market.
The post-World War II bull market, which brought the market well above its 1920s highs, lasted until 1966.
On November 14, 1972 the average closed above 1,000 (1,003.16) for the first time, in the midst of a lengthy bear market.
The 1980s and especially the 1990s saw a very rapid increase in the average, though severe corrections did occur along the way.
The largest one-day percentage drop since 1914 occurred on “Black Monday”, October 19, 1987, when the average fell 22.6%.
The largest one-day percentage gain since 1932, 10.15%, occurred two days later on Wednesday, October 21, bringing the Dow back above 2,000 and in line for a yearly gain.
On November 21, 1995 the DJIA closed above 5,000 (5,023.55) for the first time.
On March 29, 1999, the average closed at 10,006.78, its first close above the 10,000 mark.
On May 3, 1999, the Dow closed at 11,014.70, its first close above 11,000.
The uncertainty of the early 2000s brought a significant bear market, and whether it has ended or simply gone into hibernation has been an ongoing subject of debate.
On January 14, 2000, the DJIA reached a record high of 11,750.28 in trading before settling at a record closing price of 11,722.98; these two records would not be broken until October 3, 2006.
The largest one-day point gain in the Dow, an advance of 499.19, or 4.93%, occurred on March 16, 2000, as the broader market approached its top.
The largest one-day point drop in DJIA history occurred on September 17, 2001, the first day of trading after the September 11, 2001 attacks, when the Dow fell 684.81 points, or 7.1%. By the end of that week, the Dow had fallen 1,369.70 points, or 14.3%. A recovery attempt allowed the average to close the year above 10,000.
By mid-2002, the average had returned to its 1998 level of 8,000.
On October 9, 2002, the DJIA bottomed out at 7,286.27 (intra-day low 7,197.49), its lowest close since October 1997.
By the end of 2003, the Dow returned to the 10,000 level.
On January 9, 2006 the average broke the 11,000 barrier for the first time since June 2001, closing at 11,011.90.
In October 2006, four years after its bear market low, the DJIA set fresh record theoretical, intra-day, daily close, weekly, and monthly highs for the first time in almost seven years, closing above 12,000 for the first time on the 19th anniversary of Black Monday.
The individual components of the DJIA are occasionally changed as market conditions warrant. They are selected by the editors of The Wall Street Journal. When companies are replaced, the scale factor used to calculate the index is also adjusted so that the value of the average is not directly affected by the change.
On November 1, 1999, Chevron, Goodyear Tire and Rubber Company, Sears Roebuck, and Union Carbide were removed from the DJIA and replaced by Intel, Microsoft, Home Depot, and SBC Communications. Intel and Microsoft became the first two companies traded on the NASDAQ exchange to be listed in the DJIA. On April 8, 2004, another change occurred as International Paper, AT&T, and Eastman Kodak were replaced with Pfizer, Verizon, and AIG. On December 1, 2005 AT&T’s original T symbol returned to the DJIA as a result of the SBC Communications and AT&T merger.
The Dow Jones Industrial Average consists of the following 30 companies:
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3M Co. (NYSE: MMM) (conglomerates)
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ALCOA Inc. (NYSE: AA) (aluminum)
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Altria Group Inc. (NYSE: MO) (tobacco, foods)
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American Express Co. (NYSE: AXP) (credit services)
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American Int’l Group Inc. (NYSE: AIG) (insurance)
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AT&T Inc. (NYSE: T) (telecoms)
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Boeing Co. (NYSE: BA) (aerospace/defense)
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Caterpillar Inc. (NYSE: CAT) (equipment)
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Citigroup Inc. (NYSE: C) (money center banks)
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Coca-Cola Co. (NYSE: KO) (beverages)
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E.I. du Pont de Nemours & Co. (NYSE: DD) (chem)
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Exxon Mobil Corp. (NYSE: XOM) (oil & gas)
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General Electric Co. (NYSE: GE) (conglomerates)
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General Motors Corp. (NYSE: GM) (auto)
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Hewlett-Packard Co. (NYSE: HPQ) (computers)
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Home Depot Inc. (NYSE: HD) (home stores)
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Honeywell International Inc. (NYSE: HON) (conglo)
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Intel Corp. (NASDAQ: INTC) (semiconductors)
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International Business Machines Corp. (NYSE: IBM)
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Johnson & Johnson (NYSE: JNJ) (consumer care)
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JPMorgan Chase & Co. (NYSE: JPM) (money banks)
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McDonald’s Corp. (NYSE: MCD) (restaurant franchise)
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Merck & Co. Inc. (NYSE: MRK) (drug manufacturers)
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Microsoft Corp. (NASDAQ: MSFT) (software)
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Pfizer Inc. (NYSE: PFE) (drug manufacturers)
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Procter & Gamble Co. (NYSE: PG) (consumer goods)
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United Technologies Corp. (NYSE: UTX) (conglomerates)
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Verizon Communications Inc. (NYSE: VZ) (telecoms)
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Wal-Mart Stores Inc. (NYSE: WMT) (variety stores)
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Walt Disney Co. (NYSE: DIS) (entertainment)
Apart from investing in the individual stocks in the Dow Jones, there also is the option to invest in an exchange-traded fund (ETF) which represents ownership in a portfolio of the equity securities that comprise the DJIA. This ETF is called the Diamonds, and the ticker symbol is AMEX: DIA. The units of this ETF, therefore, represent an opportunity for the investor to achieve the same performance of the DJIA (minus fund expenses) and trade like any other stock on the Amex Exchange, so they can be bought on margin, sold short or held for the long term. Dow futures and option contracts trade actively on the Chicago Board of Trade (CBOT).
Like most other stock market indices, the Dow undergoes periods of general increase and general declines or stagnation. A bull market is a term denoting a period of price increases, while a bear market denotes a period of declines. Wall Street generally considers a bear market in session when the main stock market index is more than 20 percent below its all-time high. By this definition, as of the close of 2006, the Dow will enter a bear market if it sustains a fall below the 10,000 point milestone, which it last touched in April 2005.
There are two types of bull markets. A secular bull market is a period in which the stock market index is continually reaching all-time highs with only brief periods of correction, as during the 1990s, and can last upwards of 15 years. A cyclical bull market is a period in which the stock market index is reaching 52-week or multi-year highs and may briefly peak at all-time highs before a rapid decline, as in the early 1970s. It usually occurs within relatively longer bear markets and lasts about three years.
The following are the secular bull and bear markets experienced by the Dow since its inception:
1896 “ 1929: Bull market. In the summer of 1896 the Dow sheds 30% to set an all-time low of 28.48, but quickly erases its losses, and eventually grows to a closing high of 381.17 (theoretical intra-day high of 386.1) on September 3, 1929.
1930 “ 1948: Bear market. The stock market crash of 1929 precedes the Great Depression. The Dow plunges to 41.22 (theoretical intra-day low of 40.56) on July 8, 1932, thus erasing 36 years of gains. From here, the index would take 22 years to surpass its previous highs.
1949 “ 1966: Bull market. The Dow posts impressive growth in the booming economy following the Second World War . Starting from about 150 in June 1949, when P/E ratios reach multi-decade lows, the index ends just five points below 1,000 on February 9, 1966.
1967 “ 1982: Bear market. Traders deal with a stagnant economy in an inflationary monetary environment. The Dow enters two long downturns in 1970 and 1974; during the latter, it falls nearly 45% to the bottom of a 20-year range. The index approaches the 1,000 milestone at the top of its range three times in 1972, 1976 and 1981, but fails to break the mark decisively.
1982 “ 2000: Bull market. The Dow experiences its most spectacular rise in history. From a meager 777 on August 12, 1982, the index grows more than 1,500% to 11,722.98 (actual and theoretical intra-day highs of 11,750.28 and 11,908.50) by January 14, 2000.
2000 – undetermined: Bear market. The Dow struggles with the 10,000 – 11,000 range for a year and then deteriorates into a panic atmosphere of severe declines punctuated by brief and violent rallies. The index hits a closing low of 7,286.27 (actual and theoretical intra-day lows of 7,197.49 and 7,181.47 the following day), 38% below its highs, on October 9, 2002. The records of early 2000 stood until the fourth quarter of 2006.
On October 3, 2006, the Dow achieved new record closing and intra-day highs for the first time in nearly seven years. Later that month, the index closed above 12,000 for the first time (October 19), and stayed above the milestone to set record weekly (October 27) and monthly (October 31) closing levels. While some experts might consider the concurrent record highs on the DJIA, the Dow Jones Transportation Average, and the Dow Jones Utilities taking place on February 14, 2007 (the first time that all three finished at record highs on the same day since March 17, 1998) as Dow Theory confirmation that the bear market ended in 2002, the depressed state of the technology market compared with 2000 leaves that a matter of dispute. It is notable, however, that both the tech-laden NASDAQ Composite and the broader S&P 500, while not yet at all-time highs, both achieved six-year monthly closing highs concurrently with the DJIA on November 30, 2006.
Today Dow Jones is the most influential stock market in the world – it is the heart beat where the blood of other stock markets in the world depends on.
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