The History and Evolution of the DJIA

DJIA

The Dow Jones Industrial Average, also referred to as DJIA, or the Dow, consists of the 30 large public owned companies which are located in the United States and it tracks their value along with details about trading in the stock market during key points in time. While most people who are not experts in the market understand the basics of the purpose of the Dow, it’s worth noting that the value of the Down isn’t a representation of the included companies’ market cap, but rather the total of the price of a single share of stock taken for each of the companies, so in essence, it’s the value of 30 single separate stocks with corrections by a factor that changes when one of the companies split stocks or pay dividends in order to maintain consistency in the value that makes up the index. To better understand the significance of the Dow, it’s important to know its history and how it has evolved through time as well as its multiple purposes in the economic picture of the country. The Dow Jones Transportation Average is the oldest US market index. The Dow Jones Industrial Average is the second oldest index in the history of the United States. In 1929, the Down Jones Utility Average was established.

Founder and establishment of the Dow

The Dow Jones Industrial Average first came into existence on May 26, 1896. A Wall Street Journal editor named Charles Dow is credited with its creation. The DJIA stock market index is named after Mr. Down and Edward Jones, a statistician to show how the 30 companies which are also included in the S&P 500 traded in standard SM trading sessions. The Dow started out with just 12 of these large publicly traded stocks when it was first established. More companies were added through the decades. When the DJIA was first established, the starting point was just 40.94 and it was not regularly referred to in the Wall Street Journal until October 7th of 1896.

The makeup of the original DJIA companies

The first 12 companies which were included in the original Dow Jones Industrial Average were American Tobacco, American Sugar, American Cotton Oil, Chicago Gas, Distilling and Cattle Feeding, National Lead, Laclede Gas, General Electric, Tennessee Coal and Iron, U.S. Leather, U.S. Rubber and North American. The rationale for choosing these specific companies is because they represented each of the market sectors within the economy of the United States in order to provide a picture of how the overall economy was functioning.

How the core components of the Dow evolved

While there is not a large manifesto of rules governing which companies are included in the Dow Jones Industrial Average, there are a few characteristics which are necessary for a company to be included. They must represent a significant percentage of the economic activities taking place in the United States.They are also required to be listed on the New York Stock Exchange or NASDAQ and they must be among the major businesses in the industrial category. Those in charge of the Dow make continual changes so the DJIA reflects changes taking place within the US economy and these changes are made with regard to the companies included. To provide an accurate picture of the overall economy, the number of companies was increased from 12 to 30, with a range of companies that represent each sector in the market and this is an ongoing job for those in charge of deciding which companies need to be a part of the Dow as the market is in continual flux and the onset of new technology has disrupted the core component on a regular basis. Companies are continually acquiring and absorbing new companies that are sometimes within their classification, but sometimes the large mergers result in a diversification. There is a lot to stay on top of to maintain consistent and accurate results.

Recent changes in the Dow and current components

In March of 2015, AT&T was replaced by Apple, Inc., followed by yet another change when the Dow Chemical Company and DuPont merged in the fall of 2017, and DowDuPont replaced DuPont. Other recent changes include General Electric being taken off the Dow and being replaced by Walgreens Boots Alliance. As of May of 2019, the current components of the Dow Jones Industrial Average are: 3M MMM Conglomerate which was added in 1976; American Express Financial Services added in 1982; Apple Tech added in 2015; Boeing Aerospace in 1987; Caterpillar Construction in 1991; Chevron Oil & Gas in 2008; Cisco Tech in 2009; Coca-Cola Food and Beverages in 1987; Disney Entertainment in 1991; DowDuPont Inc Chemical Industry in 2017; Exxon Mobil Oil & Gas in 2013; Goldman Sachs Financial Services in 2013; IBM Tech in 1976; Intel Tech in 1999; Johnson & Johnson Pharmaceuticals in 1997; JPMorgan Chase Financial Services in 1991; McDonalds Food in 1985; Merck & Company Pharmaceuticals in 1979; Microsoft Tech in 1999; Nike Apparel in 2013; Pfizer Pharmaceuticals in 2004; Procter & Gamble Consumer Goods in 1932; UnitedHealth Managed health Care in 2012; Verizon Telecom in 2004, Visa Financial Services in 2013; WalMart Retail in 1997; and Walgreens Boots Alliance Retail in 2018.

As you can see from the list above, there have been significant changes made to the Dow since its inception. There was a necessity to expand the number of companies included as the economy of the United States became more diversified as new sectors opened up within the market. We’re seeing yet the potential for more change as new technologies open up significant new sectors that help to make up the overall picture. The Dow will continue to change and to evolve as necessary to continue to provide economists with an accurate representation of the value of the companies and the economic health of the nation as reflected in the domestic stock market.

Provisions made by the Dow Jones Industrial Average

The Dow gives us important information about the stock averages to better understand what is going on in the stock market when it comes to the big picture. In the early days of its operation, investment in stocks was not highly regarded by investors as the best way to invest their money. Instead, bonds were the most popular because they were supported by more tangible industrial assets such as factories, machinery and other assets. The Dow served as a good benchmark for serious investors to gain a sense of what was going on in the stock market and it gave them a good idea of whether it was flourishing or performing poorly. The Dow helped analysts to know when the market was thriving in a Bull prior with rising peaks and troughs, and when it was a bear market with dropping peaks and valleys. It became a useful tool for performing these functions, but it also served another important purpose. It reflected how global events, war, politics and other factors affected the stock market and the overall economy. Stock trading is influenced by a number of factors that may either make traders buy, sell or hold onto their stock in certain sectors of the market and this information is of high value for economists and investors alike. As we review the history of the Dow and take a moment to think about the companies that it started out with for its core components, and the changes which have recently been made and why, we see an evolutionary process that maintains one constant, and that is change. Even the diversity in the industries represented shows us how much our economy has changed itself and been affected by the activities of big business in America. Some companies have been with the Dow for several decades and some deleted and replaced with more relevant choices. The Dow consistently alters its core components to include companies which are leaders within the major sectors of the market of the economy for the most accurate picture in terms of averages.

Historical sampling of the DJIA

In January of 1900 The Dow points were 68.13 and the following year were 70.44 followed by 64.32 in 1903 and as low as 49.11 on the last day of 1903, having started out at 64.60 on January 2 of the same year. The history from 1900 shows some significant milestones with DJIA closes which rose substantially since its date of inception. A few noteworthy milestones which show significant growth include November 14 of 1972 with a close at 1,003.16, January 8, 1987 at 2,002.25; April 17 of 1991 surpassed the 3,000 mark, February 23 of 1995 was over 4,000, 1995 was above 5,000; and it rose above 6,000 in October of 1995, 7,000 in February of 1997, followed by a rise over 8,000 in July of the same year, over 9,000 in May of 1998 and the Dow reached a record high at its close on October 3, 2018 at 26,828.39.

Who is in charge of the Dow?

Who owns the Dow Jones Industrial Average anyway? It’s changed hands and as of 2012, S&P Dow Jones Indices LLC officially became the owner through purchase. The venture is shared jointly between the CME group, and is controlled by its largest shareholder S&P Global. The DJIA owns three major stock indices including the Case/Shiller housing index, the Vix Volatility index and the S&P 500. Within this trio, S&P Global is a manager of thousands of indices and these represent all of the asset classes which are in existence. The companies which the Dow tracks make up a quarter of the total United States market and it’s risen in popularity since the days that it was first established to become one of the most often quoted indices in the world today. The Dow uses these three main indices to arrive at the figures or averages that are produced.

The value of its history

The DJIA maintains a comprehensive historical chart that allows economists and analysts to look backwards in time over the major historical events within the nation’s economy. The 100 year historical chart provides useful insights into the history of the market and its performance over time. When significant events taking place within the country and the world are compared with the historical date preserved through the Dow, it is much easier to detect correlations within these evens and the health of the economy. It’s one of the tools that has become invaluable for determining how specific environmental conditions, trends, political climate and world events impacted the market in the past, as well as how they affect it currently, and it also provides tools that help to make predictions in the market as well as in the economy based upon a myriad of influential factors. The Dow offers a broad range of charts and analyses which can be configured in terms of decades, annual, monthly, daily and even hourly updates. When attempting to predict market activity based upon known events or trends, the DJIA is of great value.

What happened to the 12 original Dow Jones Industrial Average companies?

It’s worth your time to take a look at the original 12 companies which made up the first DJIA. This helps us to better understand the evolution of the Dow and to see how businesses have changed and evolved themselves throughout the history of the nation. The first company that we look at is the American Cotton Oil company. It went on to become a part of the Best Foods corporation, which is one of the leading producers of the condiment mayonnaise as well as many other food products. American Sugar became Amstar Holdings. Chicago gas was affected by mergers and acquisitions and ultimately became a part of the company that is known as People Energy.

National Lead is now known as NL Industries. It was kept on the Dow until 1916, at which time it was removed. Distilling & Cattle Feeding became Millennium Chemical, and Tennessee Coal & Iron was purchased by the industrial giant U.S. Steel in 1907. Laclede Gas was one of the first businesses to be dropped from the Dow in 1899, however, it is still in business today, it’s just not the best choice for representing its niche within the industry. U.S. Rubber continued to do well up until this day as it was absorbed into the Michelin company, as a component of the company that focuses upon the acquisition of rubber as well as its processing for the tire manufacturing business.

North American was a utility that didn’t survive past the 1940s as it was broken up during this era. U.S. Leather Pfd didn’t fare well either as in 1952, the company was dissolved. American Tobacco fared so well that it became too large for its own good and in 1911, it was broken up by anti-trust action. General Electric held its position within the Dow up until it was replaced by Walgreens Boots in 2018. The first major expansion of the Dow came in 1916 when it grew to include 20 core component companies, and its next growth occurred in 1928 when it admitted 30 companies into the core just prior to the stock market crash of 1929.

Other notable companies which were included in the Dow

While we’re looking at the history of the DJIA, it’s worth noting the changes by looking at a few of the other companies that were also previously included as core components. In 2004, there were several significant changes made. Three former companies on the Dow were the International Paper Company, the Eastman Kodak Company and AT&T Corporation. They were replaced with Verizon Communications, Pfizer Incorporated and American international Group Incorporated.

In 2008, Honeywell and Altria Group which were previously included were replaced by Bank of American and Chevron. Chevron was removed in 1999, then the American International Group was replaced by Kraft Foods, Inc in 2008. Citigroup and General Motors Corporation were also former core members which were replaced by Cisco Systems and the Travelers Companies in 2009. Moving ahead to 2012, Kraft Foods Inc split becoming Kraft Foods Group and Mondelez International and was replaced by United Health. Hewlett Packard, Bank of America and Alcoa were replaced by Nike, Goldman Sachs and Visa in September of 2013. These were the previous changes made that were followed by the more recent changes we’ve already covered from 2015 through current

A deeper understanding of the DJIA

One of the most common questions that is asked about the Dow Jones Industrial Average is how does it work? We know that it pulls 30 of the leading companies in the United States representing their niche in the industry that affects the overall market and economy. There is a lot more to it than that. It’s a stock index that has a specific method for determining the stock averages for each company within its core. The stocks with a higher share price carry a larger weight over those with a lower price within the core. It is very much a price-weighted index. The Dow has evolved in the methods that it uses to make these calculations from the initial methodology. The first Dow averages used a simple formula that added the stock prices of each of the 12 companies included within its core and then divided them by 12. As time went on this method was morphed into a new format which adds all 30 stock prices and then they are divided by the Dow Divisor which is developed in a way that counteracts the effect of changes which take place in the stocks of individual companies such as stock splits and other structural changes. As of 2018, the Dow Divisor was 0.14748071991788. The highest price stock represents 70 percent of the total stock value within the index and an increase in the price of that stock has a larger effect upon the index as a whole.

What are the influences on the Dow Jones Industrial Average?

There are several influences which affect the DJIA. The biggest is consumer credit. This factor makes up 13 percent to the Dow with its effects reflected when increases occur as increases in the Dow and the same for decreases. The Dow is a reflection of consumer installment credit activities from the past 6 months and it is a reliable indicator of past activity in this sector. It is also influenced by stock market activity within the past two months which have a 9 percent influence on the numbers. Exports and imports also influence the indices that lets us know the strength of our national economy within the global market. Finally the Dow goes up as the money supply increases and it goes down in the same regard.

Final thoughts

The Dow Jones Industrial Average has gone through a series of changes throughout the decades since its establishment. It has become one of the most important tools for showing where the market and national economy has been though history and what the current status is. It’s a tool that is widely used by analysts and economists who use the historical data for the purposes of market prediction and for calculating where the financial status of the country is at. It’s also useful for investors who know how to properly use the information to determine which stocks will make the best investments with the least amount of risk.


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