Dow Jones: A True Cross Section Of American Industry?

If you ask a financial analyst or expert trader how to get a picture of where the global economy is currently headed, they will likely tell you to consult the Dow Jones Industrial Average. The second-oldest market index in the US, the Dow Jones today is a vital indicator of the health and direction of travel of the world’s largest and most globalized economy. But delving a little deeper, is it still an accurate cross-section of the American industry of today?

  • The History of the Dow Jones Industrial Average: 1884-2020
  • Is the Dow Jones Still Purely Industrial?
  • Dow Jones and the White House
  • Does the Dow Jones Represent the US Economy?
  • Dow Jones vs The World
  • Conclusion

Put simply, the Dow Jones Industrial Average is a collection of the 30 largest American companies, representing $8.33 trillion in total market capitalization today, with Dow Jones stock generally among the most sought-after and heavily traded in the world.

However, the Dow Jones is more than just a ranking of the top performers in the US economy. Its performance largely (although not always) mirrors that of the American economy, and a bad day for the Dow Jones is almost invariably a bad day for the world. Understanding the Dow Jones and what makes it tick is imperative for any budding economist, analyst, trader, or investor. The myriad factors that cause the Dow Jones ticker to move up or down reflect the social, political, cultural, and technological developments that continue to shape the global economy today.

The 30 companies that make up the Dow Jones right now are all household names that are known the world over, even by those with only a passing interest in business and finance. However, does that mean that the Dow Jones is actually a fair representation of the US economy? Throughout the years, numerous criticisms have been leveled at the Dow Jones by market watchers who believe that it does not paint an accurate picture of the economy at large.

There are many arguments put forward to justify this position, with the most prominent one being that the Dow Jones, with only 30 companies represented, is much too limited compared to other US indices such as the S&P 500 or the Russell 3000. Nonetheless, the Dow Jones is still one of the most respected and heavily consulted and traded indices on the planet. Let’s take a closer look at the long and eventful history of the Dow Jones, before assessing whether it still provides a representative snapshot of the US economy in 2020.

The History of the Dow Jones Industrial Average: 1884-2020

The Dow Jones Industrial Average, is, after the Dow Jones Transportation Average, the oldest stock index in America, and one of the oldest indices of its kind in the world. It is therefore unsurprising that it has seen considerable ups and downs and plenty of drama, given that it has affected and been affected by some of the most important events in world history. As the DJIA enters its 135th year of existence, let’s take a look at some of the most noteworthy periods in its existence.

(Click on image to enlarge)

A history of dow jones

Source 1: Investopedia

Source 2: Investors

Source 3: Listen to the Music by Steve Richards

Source 4: Investopedia

Source 5: New York Times

Source 6: The Stock Market by Donna Jo Fuller

Early Years (1884-1914)

The DJIA was originally developed by Charles Dow, the journalist who founded the Wall Street Journal and pioneered a number of groundbreaking theories of market analysis that are still widely used today. The earliest conception of the index came in the form of a daily two-page bulletin attached to issues of WSJ, which would summarize the performance of 14 largely transportation-oriented companies that day. It wasn’t until 1896 that Charles Dow decided to calculate an average index of the largest industrial stocks, in the hopes that such an index would be more useful for those trying to get a comprehensive snapshot of the wider economy. The Dow Jones Industrial Average index first consisted of 12 companies that represented the crème de la crème of American industry. Although some of these companies are still going strong today, none of them have featured on the Dow Jones trading index for a while. Here is the full Dow Jones companies list of the very first components, as they appeared 124 years ago:

  • American Cotton Oil Company (now a subsidiary of Unilever)
  • American Sugar Refining Company (now Domino Foods Inc.)
  • American Tobacco Company (defunct)
  • Chicago Gas Company (now a subsidiary of Integrys Energy Group)
  • General Electric (left Dow Jones in 2018)
  • Laclede Gas Company (now Spire Inc.)
  • North American Company (defunct)
  • Tennessee Coal, Iron and Railroad Company (acquired by US Steel in 1907)
  • United States Leather Company (defunct)
  • United States Rubber Company (acquired by Michelin in 1990)

When the index was first published, it stood at a mere 62.76 points. Compare this to the record-high of 29,551.42 points, reached on February 12, 2020, and it is clear that the Dow Jones has come a long way since then.

While the first few years of the DJIA were relatively muted compared to later decades, it did see many of the most significant percentage point shifts in its history, owing largely to the smaller size overall. Up until the turn of the 20th century, the Dow Jones rose steadily and was virtually uninterrupted. However, this quickly changed as some of the earliest panics and bubbles in American history began to impact on the most important industrial players. 1901 saw the New York Stock Exchange’s first-ever crash, aptly dubbed the ‘Panic of 1901’. This brief but dramatic crash, which wiped 16 points off the Dow Jones in a single day, was largely driven by railroad executive E.H. Harriman competing with J.P. Morgan to acquire majority ownership of the Northern Pacific Railway. To achieve this, Harriman began furiously buying up stock in the company, which in turn caused a market distortion leading to a bubble, then a panic, then a crash that affected all companies on the Dow Jones stock market.

A more dramatic crash and the first truly major test for the DJIA came a few years later, in 1907. At this time the USA was in the midst of a recession, and the sudden collapse of a number of prominent trust companies, most notably the Knickerbocker Trust Company, sparked panic and a run on the banks that wiped as much as 50% off the value of the Dow Jones average in just a few weeks. The following decade was characterized by minor gains punctuated by short crises. The Dow Jones closed at over 100 points for the first time in 1906. However, this milestone was quickly overshadowed by the San Francisco Earthquake that same year, which impacted all of the Dow Jones companies at the time due to the widespread economic uncertainty generated by one of America’s worst-ever natural disasters. Perhaps the most significant period for the DJIA during these early decades concerns a lengthy amount of time where there was a lack of volatility on the index.

On July 30, 1914, the unthinkable happened; the New York Stock Exchange was closed outright for a period of four months, with no trading whatsoever being allowed to take place. This was the first and only time that Wall Street effectively shuttered its doors and placed the stock market on lockdown. These days, when trading is paused, it is usually done so via a breaking switch on the trading floor, and the pause only lasts for around 15 minutes, with the intention of slowing down selloffs during a panic. This unprecedented decision was taken by William Gibbs McAdoo, the US Treasury Secretary, for two reasons. The first was to reduce the chance of a sustained market crash as a result of the onset of the First World War. The second, although this is still up for debate among historians, was because it was believed that restricting trading would allow the United States to build up its gold stocks prior to the launch of the United States Federal Reserve in late 1914, ensuring that the US had enough gold to remain on par with the Gold Standard. By the time the New York Stock Exchange, and by extension the DJIA, had reopened in December 1914, much of the globe was embroiled in bloody conflict.

Boom, Bust, and Boom (1914-1960)

On the face of things, the First World War was a relatively muted time for the Dow, at least if you look at the Dow Jones historical data for that time. The index rose slowly and steadily from 1914 to 1918, with virtually zero notable booms or crashes. However, when you compare the DJIA to indices from around the world at the time, it’s clear that the situation was far from normal. In the UK, share values on the London Stock Exchange declined heavily during the war, as demand for British exports and futures dried up. Markets in Berlin and St Petersburg remained closed from 1914 right up until December 1917, meaning that listed companies saw no appreciation or decline whatsoever during this time. Meanwhile, all of the companies listed on the DJIA saw their share prices and market caps rise during what was at that point the most significant economic downturn in human history.

Following its bottom in November 1914, the Dow Jones Industrial Average doubled in price over the course of the next 12 months. The few months after that saw very little growth, but a major rally in 1916 saw strong growth, before plateauing out in the final months of the war as investors realized that the profits they had hoped would materialize from the war were much more modest than predicted. So how can this be explained? Largely this unexpected growth can be attributed to the strong position of Dow listed companies in a wartime economy. The biggest stock rises were seen in constituents such as General Electric, United States Rubber Company, and American Cotton Oil Company, which saw global demands for their products skyrocket. Since few other countries were able to muster up the manufacturing power of the US at this time, the Dow Jones was able to charge ahead while other indices around the world stalled or fell.

Following the conclusion of the war and a brief global recession as the global economy took stock, the American economy and the Dow Jones entered one of its most spectacular growth periods in history. The Roaring Twenties, as the period is now known, was a period of rapid economic expansion and prosperity during which global stock markets rapidly rose to dizzying heights, before crashing spectacularly. The euphoria of the decade is best reflected in the movements of the Dow Jones: 1920 to 1929 saw the most dramatic bull run in its history, rising from 73 to 381, a five-fold increase. At the peak of the market, the DJIA was officially expanded to include 30 companies rather than just 12, just as it does to this day. Of course, we all know what happened next.

In late September 1929, the bubble burst and the most devastating crash in American history began, emanating outwards from Wall Street and causing untold destitution over the course of the next decade. At the lowest point of the Great Depression, the Dow Jones lost almost 90% of its value, and the high reached on September 3, 1929, was not reached again until 1954. Recent newcomers to the DJIA such as Atlantic Refining, Nash Motors, and Goodrich were promptly kicked off the index as their share price collapsed, never to return.

While the 1930s were marked by stagnation and recession, the 1940s brought the biggest boost yet for the Dow Jones. At the darkest depths of the Second World War, soaring demand for American exports in Europe helped propel the Dow Jones to dizzying new heights and lay the foundations of the most prolonged period of prosperity in US history. The Dow grew 130% between 1942 and 1945, the three years that the United States was involved in the war.

During the post-war boom in the 1950s, as American incomes trebled and US companies became the most powerful in the world, the Dow Jones entered a historic bull market. Between 1949 and 1956, the Dow Jones Industrial Average index gained 222%, going from 161.6 points in June 1949 to closing at 521.05 points on April 6, 1956. An estimated 10 million new investors rushing into the market to begin trading on Dow Jones companies during this period, many of whom made substantial gains. If one had invested $1000 in US Steel at the beginning of the bull market, they would have a $7000 investment by the end of it. If a trader had decided to invest $1000 in IBM in 1949, by 1961 that investment would have grown to $26,300. Few other periods in economic history have seen such returns.

Stagnation, Recurring Crises, New Horizons (1960-1990)

Much of the 1960s was a relatively quiet period for the Dow and is commonly described as a period where the index “went sideways”. This is because, while modest growth did occur across the index as a whole, the actual numbers were negligible compared to what had come before, whilst investor returns were close to non-existent. This is, of course, not true across the board. Major technology companies on the Dow at that time, such as United Technologies and IBM, saw their share price rise sharply over the decade, planting the seeds for America’s first tech stock boom. Meanwhile, while the Dow companies performed sluggishly, other indices paint a much rosier picture. The S&P 500, a much broader index of American companies, earned respectable returns of around 7% during the 1960s.

There are a number of reasons attributed to the poor performance of the DJIA during this period, with the most common being the out-of-control inflation rates experienced during this time, as well as the lack of dynamism among the established industrial giants listed on the index. Nonetheless, the 1960s were a quiet decade by the standards of the Dow, with little by the way of crashes and crises materializing.

However, anybody complaining about the lack of excitement on the Dow during the 1960s was likely feeling nostalgic for it by the time the 1970s were drawing to a close. As America and the wider world spiralled into a series of economic maelstroms, not least the OPEC oil crisis (1973), the Dow Jones index entered a particularly dark period. As US relations with oil-producing Middle Eastern countries worsened, the western world was hit with an energy crisis as supply hit a historic low. Only weeks prior to the crisis the Dow Jones surpassed the 1000-point mark, only to lose 48% of its value during the 1973-74 stock market crash, during which listed US energy giants such as Standard Oil, Texaco, and Exxon were particularly hard hit. It’s worth noting here that, although the Dow’s performance was poor, overseas indices such as the FTSE 30 fared worse, with the British index losing 73% of its value during the same period. Runaway inflation and low economic confidence in the US compounded matters for the Dow, meaning that, by the end of the decade, it had only recovered slightly, closing the 1970s at 838 points.

The 1980s were years of extremes in the Dow Jones index history, with huge levels of growth tempered by brief and dramatic crashes. The first half of the decade was largely abysmal, with the Dow breaking 1000 points every few months, only to fall back to previous levels shortly after. The period of 1984-87 was one of rapid growth, as deregulation and accelerating globalization propelled the DJIA companies to new heights, with the index peaking at over 2700 points in August 1987. However, this same deregulation allowed for many of the conditions to form that caused Black Monday on October 19, 1987, in which the Dow Jones saw its largest single-day percentage drop in history, losing 22.61% before closing. Similarly, other major indices were pummeled, with the S&P 500 and Wiltshire 5000 both losing just over 18% on the same day.

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