Why the DJIA Struggles to Reflect the US Stock Market
Founded in 1885, the Dow Jones Industrial Average (DJIA) is one of America’s oldest stock indexes. Originally, it tracked the stocks of 12 large U.S. companies. In 1928, the DJIA expanded to 30 stocks, its current number.
Over the years, companies within the DJIA are often replaced by others that are deemed to better reflect the major industries within the U.S. economy. Companies selected to be part of the DJIA must also have an excellent reputation and a history of solid financial growth. The DJIA’s goal is to serve as a representative of the overall stock market and as a proxy on the overall health of the American economy. Today, that list of 30 stocks includes such bellwether companies as Johnson & Johnson, Home Depot, Caterpillar, Apple, IBM and McDonald’s.
The DJIA is often called “your grandfather’s stock index.” The analogy conveys a much simpler time of investing when investors typically bought the stocks of stable “blue chip” companies. These reliable, established companies often rewarded investors with a steady stream of dividends. Investors often bought and held these stocks for years, even decades. Some would hold onto these stocks their entire life.
Today, the DJIA is struggling for relevancy. Like the horse-and-buggy and oil lantern, it’s symbolic of a bygone era.
Over the past 25 years, the world – along with the American economy – has become increasingly complex. Thus, it’s hard to represent the breadth and scope of new industries and companies within a 30-stock index such as the DJIA. By comparison, the S&P 500 index includes the stocks of 500 leading U.S. companies. Likewise, the NASDAQ index is composed of roughly 3,700 stocks and includes many of the heavyweights in the rapidly expanding technology industry. You won’t find too many tech giants in the DJIA.
Despite its legacy as one of the world’s most recognized stock indexes, the DJIA started to lose some its relevance in the late 1990s. As you might recall, this was the time of the initial technology boom. The internet – along with advancements in computers, cellphones, personal electronic devices and e-commerce – fueled a transformational shift within our economy. Cutting-edge companies like Cisco, Oracle, Dell, EMC and Applied Materials, among many others, quickly became some of the most actively traded stocks on Wall Street.
However, by the end of 1999, the DJIA index was filled with the likes of companies such as Eastman Kodak, International Paper, Philip Morris, Minnesota Mining & Manufacturing and the Goodyear Tire & Rubber Company. It’s not that these were bad companies, but the DJIA 30-stock index was hardly representative of a new economy increasingly influenced by technology and innovation.
Technology continues to play an ever-expanding role in driving economic growth and shaping the structure of our economy. The latest innovation is artificial intelligence (AI). Companies like NVIDIA, Alphabet (Googe), Meta (Facebook), Broadcom, Palo Alto Networks and Tesla – to name just a few – are some of the largest and most influential in the world. For investors, you won’t find these companies listed in the DJIA. Like so many other of America’s leading companies, you’ll instead find them in the S&P 500 or NASDAQ stock indexes.
Mark M. Grywacheski, Investment Advisor
Quad Cities Investment Group is a Registered Investment Adviser.
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