One hundred twenty years after the birth of the Dow Jones Industrial Average, there’s
hardly a news story about the American stock market that doesn’t mention “the
Dow”—for its iconic presence in American financial markets is undeniable. Yet, over
the course of its 120 years of existence, to what extent has the Dow reflected the
nature of the U.S. economy at large?
We hear about the Dow Jones Industrial Average every day, but have you ever thought about its history? Did
you know it comprises only 30 stocks? Is it still relevant? Is it still a good indicator to track major American
industry? Is it a good benchmark for your portfolio? After all, notable companies like Amazon, Google, Facebook
and many others have no presence in the Dow, and companies that have been so much a part of American
culture like Woolworth’s, Bethlehem Steel, Sears, and even AT&T are distant memories to Dow watchers.
Take a look at the Dow in August 1982:
It was not until the spring of 1896 that Charles Dow had developed his ideas to the point where he completely
removed the railroad issues from his general market average and created two separate Averages: the Industrials
and the Railroads. Shortly thereafter, The Wall Street Journal reported an independent Railroad Average, as
well as an Average composed entirely of industrial and natural resource concerns, which became known as the
Dow Jones Industrial Average (DJIA). Although both Averages first appeared on May 26, 1896, the Industrials
were not regularly reported in the WSJ until October 7 of that year. Their starting point that day was a mere
40.94—a long way from where the DJIA sits today.
Early on, the Industrials were a dynamic Average, changing composition on an almost monthly basis. Because
the DJIA was supposed to represent the current business environment in the U.S., Charles Dow actively sought
to include the key industries of his time: sugar, spirits, leather, cordage, tobacco, gas, lead, rubber, coal, iron,
and electrical products. Therefore, the original Industrial Average boasted names like American Cotton Oil,
American Sugar, Distilling & Cattle Feeding, Laclede Gas, National Lead, and U.S. Rubber.
This is a far cry from today’s Index, which is dominated by retailing, oil, technology, pharmaceuticals, and
entertainment companies, and includes such names as American Express, Walt Disney, Merck, Microsoft, and
United Technologies. The grid below has the Dow’s most up-to-date holdings.
The only company on the original list of Industrials that has endured to the present day is General Electric,
although it has been removed from the Index twice (only to be reinstated later, obviously). The original Railroad
Average was replaced by the more generalized Transportation Average after a number of trucking, airline and
air-shipping concerns were added to it in 1970. These changes also included the first Dow stocks to come from
the tech-heavy Nasdaq, not just from the New York Stock Exchange (NYSE).
The last major development in DJIA history was the 15-stock Dow Jones Utilities Average, which first appeared
in 1929.
Despite public perception to the contrary, the Dow Averages have continued to change in recent years—and
these alterations are far from accidental. A new component has been added, on average, every three years
since the inception of the Average.
The editors of the Dow Jones Indices oversee any shifts in the composition of the Averages and see that
periodic adjustments are made, both to ensure the Dow’s continued reflection of the current business climate
and to compensate for mergers and bankruptcies involving Dow stocks. This function has maintained Charles
Dow’s original commitment to ensure that the mix of companies on the Averages remains analogous to the
broader market.
When choosing a company to represent a specific industry in the Dow, the following criteria are considered: Is
the company a leader? How long has it been around? Does it treat its shareholders well? What is its reputation
in the industry? Dow companies must be leaders in a particular industry or sector. The Dow has traditionally
comprised corporate giants and massive companies whose shares have been publicly traded for decades.
Although companies like Coca-Cola (NYSE: KO) and McDonald’s (NYSE: MCD) might appear outdated
compared to the Amazons and Facebooks of the world, that Coke and McDonald’s have been multi-billiondollar
companies for decades suggests an incredible staying power that their juvenile competition has yet
to demonstrate. Though the presence of decades-old companies like Caterpillar (NYSE: CAT) on the Index
may also make it appear antiquated, many investors forget that Caterpillar is a global company that helps to
develop and modernize the world.
The grid below is a snapshot of the August 1976 Dow, for a bit of nostalgia, yet really not that long ago:
An example of the logic used to maintain the Dow’s weighting is illustrated by the changes made in 1985 after
Dow component General Foods was bought out by tobacco giant Philip Morris. The sudden addition of Philip
Morris to the Average upset the industry weighting by doubling the number of tobacco companies (American
Brands, formerly American Tobacco, was already there). As a result, the editors of the Index decided to drop
American Brands entirely and add McDonald’s to the Industrial Average to better represent the restaurant
industry.
Regarding bankruptcies, the only company that has ever fallen off of the DJIA due to financial difficulties is
the John Manville Company, which was caught in a wave of litigation relating to its innovative fire-retardant
product, asbestos. Chrysler’s run-in with red ink—eventually resolved by a bailout from the U.S. government—
was probably responsible for its deletion in the early 1980s, although the company never did, in fact, go
bankrupt. The only other high-profile bankruptcy was Texaco in 1987, after its attempted acquisition of Getty
Oil resulted in a major fine due to a breach of contract, but Texaco was not removed from the Dow until 1997.
Even Exxon’s Valdez disaster and Union Carbide’s Bopahl tragedy were not enough to get them kicked off
the Index.
Currently, 30 stocks are listed in the Dow Jones Industrial Average, 20 in the Dow Jones Transportation
Average, and 15 in the Dow Jones Utilities Average.
Sometimes our white papers are heavy and cumbersome with detailed information on U.S. and world geopolitical and economic driver theories. Other times, we write with more levity, like our Presidential Election Cycle and Santa Claus rally papers from a few months ago. The WT Wealth Management white paper this month on the Dow Jones Industrial Average falls somewhere in-between. It’s surprising, however, that many people talk about the DJIA everyday (and no wonder: it gets all the headlines) but don’t know it’s compromised of only 30 stocks, they are unfamiliar with the Dow’s long history and are not even aware of its Transportation and Utilities Index counterparts.
To those ends, this white paper was meant to be just as nostalgic as informative. Children today will never
flip through the Sears Catalog, sit at a Woolworth’s counter, or wait a week for pictures to be developed from
Kodak film onto Kodak paper—that’s a lost generation. Thankfully, I remember those days; they show me, as
an advisor, that nothing lasts forever and innovation will always change and shape our country. So its crucial to
look far down the line for companies that will appear on our radar screens as well as those that will fade away.
Is the Dow Jones Industrial Average still a great indicator for measuring your investment success? Probably
not. It doesn’t include many of today’s major technology players that drive the economy and change the
landscape in which we live. Plus, it’s only 30 stocks—hardly a broad representation of the American landscape.
At WT Wealth Management we use the Standard & Poor 500 as our basic measurement benchmark. With its
representation of America’s largest 500 companies, it covers nine different sectors, from Industrials to Utilities
to HealthCare to Consumer Discretionary. Which means the S&P 500 represents the entire universe of the
American economy much more fairly and broadly than the DJIA does, in part because the S&P 500 includes
the major drivers of today’s economy: Wells Fargo, Amazon, Facebook, Google, FedEx, UPS, MasterCard, etc.,
etc.
We’ll leave you with a look at 1956 (oh, has the world changed):
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