Thank You, Mr. Dow

WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK.  FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON

We have looked at equity mutual funds and their constant struggle to beat the stock market.  What, exactly, is that market?  The short answer would be that the market can be whatever you want it to be.  Stock markets are composed of thousands of publicly traded companies and can be measured in various ways.  The goal of a stock market index is to compile a group of stocks that reflect the general movement of all of the stocks traded in a particular market.  Today, the three most recognizable stock market indices are the S&P 500, the NASDAQ and the grandaddy of them all, the Dow Jones Industrial Average (DJIA).  When people ask, "How did the market do?", they generally expect to hear what happened to the DJIA that day.

Charles Dow, Edward Jones and Charles Bergstresser formed Dow Jones & Company in 1882.  Their original publication was the Customer's Afternoon Letter, which later became the Wall Street Journal.  In 1884, Dow published his first stock average, which highlighted growth stocks of the time.  His first benchmark average included nine railroads (probably seen as high tech then), a steamship company and Western Union.  In May, 1896 Dow converted these original stocks into his Transportation Average and created his first Industrial Average, based on twelve companies.  One of the original industrial companies still remains as part of the average to this day, General Electric, which was organized by Thomas Edison in 1890.  Although the companies changed over the years, the DJIA included only twelve stocks until 1916 when it was increased to twenty companies.  The number increased to thirty in January, 1929, where it has stayed ever since.  The 1929 average included some companies still recognized today, but no longer in the average, such as General Motors, Goodrich, Sears Roebuck, Westinghouse and US Steel.

Originally, the average was calculated each day by adding up the stock prices of the Dow components and then dividing that by the number of stocks in the average.  This provided an accurate average only so long as none of the companies announced a stock split or issued a stock dividend to it shareholders.  As that occurred over the years, the divisor had to be recalculated.  The Dow divisor today is 0.14452124.  The DJIA is a price-weighted method of calculation.  Most of the other stock indexes today are based on the weighted market capitalization of the component companies.

In January, 1900 the  smaller average (12 stocks) was 68.13.  It took until 1920 for the DJIA to first break 100.  It peaked at 307.01 in January,1929 (then thirty stocks) before plunging after the stock market crash and subsequent depression to a low of 41.22 in 1932.  The average remained in the 100s from 1934 until December, 1949 when it closed over 200.  It did not break 1,000 until 1972, but seesawed thereafter until the beginning of the roughly eighteen year bull market in 1982.  The Dow went on to surpass 2,000 in 1987 and 3,000 in 1991.  The bull market continued with the DJIA breaking 4,000 in February, 1995 and 5,000 nine months later.  It went above 6,000 in 1996 and crossed the 11,000 mark in 1999.  The subsequent market drop, starting in 2001, lowered the average and it did not recover to its previous high until 2006.  Subsequent market increases and falls continued until May, 2013 when the DJIA crossed 15,000.

The Dow's reaching each benchmark of 1,000 points piques the interest of the public and garners media attention.  However, most experienced investors recognize that it is just that, interesting but not really significant from a financial standpoint.

Comments are always welcome.