The Dow Jones Industrial Average (DJIA), colloquially known as “the Dow”, is one of the most widely followed stock market indices in the world. As a price-weighted index that tracks 30 large publicly traded companies based in the United States, the Dow serves as a barometer for the country’s economy and a reflection of investor sentiment.
Introduction
The Dow Jones was created by Charles Dow, co-founder of Dow Jones & Company and editor of The Wall Street Journal, on May 26, 1896. Originally composed of just 12 stocks, the index was meant to provide a snapshot of the performance of the industrial sector in the American stock market.
Over its 125+ year history, the composition of the Dow has evolved to reflect the changing nature of the U.S. economy. Giants of American industry like U.S. Steel, American Tobacco Company, and General Electric were part of the early Dow. Today, prominent tech companies like Apple, Microsoft and Intel have joined stalwarts like Coca-Cola, McDonald’s, and Procter & Gamble to comprise the modern Dow.
While the S&P 500 may have wider coverage, and the Nasdaq more tech stocks, the Dow Jones Industrial Average remains the most popular and widely recognized stock index in the world. Its daily movements are analyzed by investors and financial talking heads alike.
This comprehensive guide will cover everything you need to know about the Dow Jones Industrial Average, from its composition and calculation methodology to its history and milestones.
How the Dow Jones Industrial Average Works
Composition
The Dow Jones Industrial Average is a price-weighted index comprised of 30 prominent U.S. stocks covering various industrial sectors, with the exception of transportation and utilities sectors which are covered by other Dow Jones Indexes.
As a price-weighted index, companies are weighted based on their stock price rather than market cap. This means the higher the share price of a component company, the greater its impact on the index’s value.
The current components of the Dow Jones Industrial Average are:
- 3M (MMM)
- American Express (AXP)
- Apple (AAPL)
- Boeing (BA)
- Caterpillar (CAT)
- Chevron (CVX)
- Cisco Systems (CSCO)
- Coca-Cola (KO)
- Dow Inc. (DOW)
- Goldman Sachs (GS)
- Home Depot (HD)
- Honeywell (HON)
- IBM (IBM)
- Intel (INTC)
- Johnson & Johnson (JNJ)
- JPMorgan Chase (JPM)
- McDonald’s (MCD)
- Merck (MRK)
- Microsoft (MSFT)
- Nike (NKE)
- Procter & Gamble (PG)
- Salesforce (CRM)
- The Travelers Companies (TRV)
- UnitedHealth Group (UNH)
- Verizon Communications (VZ)
- Visa (V)
- Walgreens Boots Alliance (WBA)
- Walmart (WMT)
- Walt Disney (DIS)
The components are selected by a committee at S&P Dow Jones Indices and are meant to represent seminal U.S. companies that are industry leaders in their sectors. The only company that has remained part of the index since 1896 is General Electric.
The composition of the Dow changes over time as companies get delisted, acquired, fall from prominence, or need to be replaced to ensure adequate representation of a given sector in the index. Recent changes have included Apple joining in 2015, Salesforce entering in 2020, and Walgreens Boots Alliance getting added in 2018.
Calculation Methodology
As a price-weighted index, the calculation of the Dow Jones Industrial Average value is relatively straightforward:
- Add up the per-share prices of all component stocks
- Divide the sum by the Dow Divisor
- The divisor is adjusted to account for stock splits, spinoffs, and other changes to ensure continuity of the index.
For example, if hypothetically the Dow was composed of just 3 stocks:
- Stock A – $100 per share
- Stock B – $50 per share
- Stock C – $10 per share
The sum of the share prices is $160. Assuming the divisor is 10, then the Dow Index Value would be 160/10 = 16.
If Stock A underwent a 2-for-1 stock split, its price would become $50 per share. The new sum would be $110, and the divisor may be adjusted to 11 to keep the index value unchanged at 16.
So in this example:
- Dow Divisor = 11
- Sum of Share Prices = $110
- Dow Index Value = 110/11 = 16
This simple calculation methodology allows the Dow to remain comparable over time even as share prices and index components change.
History and Milestones
Inception and Early Years
The Dow Jones Industrial Average made its debut in the Customer’s Afternoon Letter, a precursor to the Wall Street Journal on May 26, 1896. Its creator, Charles Dow, had a vision of creating a benchmark to track the overall performance of the stock market that could be easily understood by the everyday investor.
The original Dow Jones Industrial Average was composed of 12 stocks:
- American Cotton Oil Company
- American Sugar
- American Tobacco
- Chicago Gas Company
- Distilling & Cattle Feeding Company
- General Electric
- Laclede Gas Company
- National Lead Company
- North American Company
- Tennessee Coal and Iron Company
- U.S. Leather Company
- United States Rubber Company
The index opened at 40.94 points on May 26, 1896 and closed that year at 71.42 points. It reflected a booming U.S. economy at the turn of the century, surging 125% in the five years between 1896 and 1901. However, the index lost nearly half its value during the financial panic of 1907.
The Roaring 20s and the Great Depression
In the roaring 1920s, the Dow saw phenomenal growth along with the rest of the U.S. economy. It finally breached the 100 point mark in January 1906, closing above 200 for the first time in July 1924, and exceeding 300 points in September 1928.
The massive speculative bubble of the late 1920s finally popped on October 29, 1929, plunging the Dow into a prolonged bear market. The index lost nearly 90% of its value over the next three years. It bottomed out at 41.22 on July 8, 1932 losing 89% from its pre-crash high. This period marked the beginning of the Great Depression, a severe global economic crisis that persisted through the 1930s.
Post World War II Boom
Following the end of World War II, the American economy embarked on one of its greatest expansionary periods. Corporate profits surged and the Dow finally reclaimed its pre-Depression peak in November 1954. It crossed 500 points in 1956 and topped 1000 points for the first time in 1966.
The 1960s marked a golden period for the Dow as it gained ground from 616 points in 1960 to 969 points at the end of 1969, despite a mild recession between 1960-1961. The index demonstrated its resilience by recovering quickly from dips related to the Cuban Missile Crisis and the assassination of President Kennedy during the decade.
Stagflation in the 70s
The Dow rally finally ran out of steam mired by stagflation – the unprecedented combination of high unemployment and rampant inflation. After topping 1,000 points in 1966, the index struggled for the next 16 years hampered by the 1973 oil crisis and severe 1973-75 recession.
Eventually the Dow managed to break through the 1000 mark again in late 1982 as inflation cooled off and the economy stabilized. The 1,000 point barrier was tested again during the Black Monday crash on October 19, 1987 which saw the index plunge 508 points or 22.6% in a single day. But the Dow recovered within two years, highlighting the underlying strength of American companies.
Long Bull Run from the 90s to Late 2010s
The 1990s heralded the beginning of the longest bull market in Dow history. The index rose from 2,753 points in January 1990 to 11,497 points by the year 2000. This more than four-fold increase was fueled by a technology boom, roaring American economy, and productivity gains from internet adoption.
The Dow did take a hit following the dot-com crash wiping out almost 40% of its value from 2000-2002. But the subsequent housing boom and easy money policies quickly reignited the uptrend. The Dow surpassed 14,000 points for the first time in July 2007 right before being derailed again by the 2008 financial crisis.
The crisis wiped out 53% from the Dow over the next 17 months. But the index recouped these losses within the next 5 years, fueled by low interest rates and quantitative easing. This epic bull run finally peaked at 26,616 points in January 2018 before being interrupted by the COVID-19 pandemic.
The COVID-19 Crash and Recovery
By mid-February 2020, the Dow had risen to 29,551 points reflecting 11 straight years of gains from the 2008-09 financial crisis low. But the COVID-19 pandemic and economic lockdowns triggered a breathtaking plunge over the next month.
Between February 12 and March 23, 2020 the Dow collapsed 37% to 18,591 points – wiping out all the gains since 2017 in the fastest fall from a record high in the index’s history.
But swift intervention by the Federal Reserve and U.S. government through rate cuts, bond buying, and stimulus packages ignited a quick recovery. Fueled by economic reopening and optimism over vaccines, the Dow recouped all its losses by November 2020.
The index continued its upward march through 2021 and early 2022 buoyed by massive fiscal and monetary stimulus. However, concerns over multi-decade high inflation and the Federal Reserve’s tightening cycle have weighed on the Dow since the start of 2022. At the time of writing, the index is once again testing its lowest levels since the early days of the pandemic recovery.
Dow Milestones and Records
Here are some of the key milestones and records in the Dow’s 125+ year history:
- First close above 100 points – January 1906
- First close above 200 points – July 1924
- First close above 300 points – September 1928
- Touched peak of 381.17 points on September 3, 1929 before the Crash and Great Depression
- Bottomed at 41.22 points on July 8, 1932 marking an 89% drop from the pre-Crash peak
- First close above 500 points – March 1956
- First close above 1,000 points – November 1972
- Single day record drop – Black Monday crash on October 19, 1987 plummeted 508 points or 22.6%
- First close above 2,000 points – January 1987
- First close above 3,000 points – April 1991
- First close above 4,000 points – February 1995
- First close above 5,000 points – November 1995
- First close above 6,000 points – October 1996
- First close above 7,000 points – February 1997
- First close above 8,000 points – July 1997
- First close above 9,000 points – April 1998
- First close above 10,000 points – March 1999
- First close above 11,000 points – May 1999
- Record one day point gain – 936.42 points on March 16, 2000
- Dropped to intraday low of 6547.05 on September 21, 2001 following 9/11 attacks before recovering
- First close above 12,000 points – October 2006
- First close above 13,000 points – April 2007
- First close above 14,000 points – July 2007
- Set record high of 14,164.53 on October 9, 2007 before the Great Recession
- Bottomed at 6,547.05 points on March 9, 2009 for a 53% drop during the Financial Crisis
- First close above 15,000 points – May 2013
- First close above 16,000 points – November 2013
- First close above 17,000 points – July 2014
- First close above 18,000 points – December 2014
- First close above 19,000 points – November 2016
- First close above 20,000 points – January 2017
- First close above 21,000 points – March 2017
- First close above 22,000 points – August 2017
- First close above 23,000 points – October 2017
- First close above 24,000 points – November 2017
- First close above 25,000 points – January 2018
- Set record high of 26,616.71 on January 26, 2018
- Plunged 37% to 18,591 points between February 12 and March 23, 2020 due to the COVID-19 pandemic
- Made fastest recovery from a 30% drop in history regaining all lost ground by November 2020
- Set new closing record high of 36,799.65 points on January 5, 2022 before decline on rate hike fears
Dow Jones Analyses and Predictions
As the most widely followed stock market index, there is endless analysis and predictions floating around regarding the future path of the Dow Jones Industrial Average.
Strategists and investment banks issue periodic price targets for the Dow based on their economic analysis, interest rate expectations, valuation models, and technical indicators. For instance, a bullish strategist may set a target of 40,000 for end-2024, while a more bearish one may call for a decline to 27,000.
Daily analysis focuses on key support and resistance levels that could trigger the next short term move. For example, if the Dow is trading around 32,500, technical analysts would identify the 200-day moving average near 31,800 as an important support, while the June high of 34,000 as a resistance.
Beyond the professionals, retail traders share their own predictions on social media and financial websites. More exuberant amateurs may call for a surge to 45,000 or even 100,000 driven by optimism around economic growth, while skeptics warn of an imminent multi-year bear market with a decline to 20,000.
Most analysts also monitor key indicators like the P/E ratio of the index, breadth indicators, investor sentiment surveys, and macroeconomic data to assess if the market is overheating or close to a bottom. But accurately timing the peaks and troughs in the Dow has proven challenging even for seasoned veterans.
Ultimately, the Dow evolves along with the American and global economy in a path that cannot always be predicted. Its long-term upward trajectory is supported by economic growth and corporate earnings expansion. But overvaluation, tight monetary policy, excessive speculation, and shock events can cause severe interim setbacks along the way.
Investing in the Dow Jones
For most investors, the easiest way to gain exposure to the Dow Jones Industrial Average is by investing in an index fund like the SPDR Dow Jones ETF (DIA). The exchange traded fund directly mirrors the Dow by holding the same 30 stocks in the same weights and has extremely low fees of just 0.16%.
Many brokerages also offer Dow index mutual funds and other products like futures and options contracts that track the blue chip index for a diversified investment. Portfolio managers who want to beat the Dow may hold its components but overweight certain stocks they are more bullish on compared to the index weights.
Active traders often use Dow e-mini futures or options on the futures to speculate on short term moves. Day traders can take advantage of the intraday volatility in the Dow through derivatives or trading the DIA ETF.
Investors can also indirectly benefit from the performance of the Dow components that dominate many 401(k) plans and passive index funds like the S&P 500 which has significant overlap with the Dow.
Conclusion
For over 125 years, the Dow Jones Industrial Average has served as a leading benchmark of the health of corporate America and investor sentiment. Despite its flaws, the Dow remains one of the most widely followed and trusted indices globally.
While far from a comprehensive market barometer, the Dow’s relatively small basket of 30 prominent stocks offers a snapshot of the largest titans of American industry. Its movements also reflect economic and political developments that can sway trader psyche and move markets.
Despite periodic busts, the Dow has rewarded long term investors handsomely over the past century. Its future direction will sway with the American economy as it faces changing business dynamics, technological disruption, societal trends and unexpected shock events through the 21st century and beyond. But the core strength of the largest U.S. companies will likely continue to drive gains over the long run to reward patient investors.