The History of the Dow Jones: A Global Financial Benchmark
The Dow Jones Industrial Average (DJIA), often simply referred to as “the Dow”, has become one of the most recognisable and influential stock market indices worldwide. While it may seem far removed from our shores, the Dow’s movements have significant implications for global markets, including our own. Let’s delve into the rich history of this financial powerhouse and explore its relevance to Kiwi investors.
Origins and Early Years
The story of the Dow begins in the late 19th century with Charles Dow, a financial journalist with a keen interest in making stock market trends more accessible to the public. In 1882, Dow, along with Edward Jones and Charles Bergstresser, founded Dow Jones & Company. This company would go on to become a cornerstone of financial journalism, publishing The Wall Street Journal, which remains one of the world’s most influential financial publications.
On 26 May 1896, Charles Dow introduced the Dow Jones Industrial Average, initially comprising 12 companies that he believed represented the industrial backbone of the American economy. These original components included American Cotton Oil, American Sugar, American Tobacco, Chicago Gas, Distilling & Cattle Feeding, General Electric, Laclede Gas, National Lead, North American, Tennessee Coal and Iron, U.S. Leather, and U.S. Rubber.
Evolution and Expansion
The DJIA has undergone numerous changes since its inception. In 1916, the number of stocks in the index increased to 20, and in 1928, it was expanded to 30 companies, where it remains today. The composition of the index has changed significantly over time, reflecting the evolving nature of the American economy.
Interestingly, of the original 12 companies, General Electric had the longest continuous presence on the index, spanning over 120 years until its removal in 2018. This longevity is a testament to both the company’s endurance and the index’s ability to adapt to changing economic landscapes.
Calculation Method
Unlike many other stock market indices, the Dow uses a price-weighted system rather than market capitalisation. This means that higher-priced stocks have a greater influence on the index’s movements. While this method has been criticised by some financial experts as outdated, it remains a key feature of the Dow’s calculation.
Milestones and Market Reflections
The Dow has witnessed numerous significant milestones throughout its history. It crossed the 1,000-point mark on 14 November 1972 and reached 10,000 on 29 March 1999. These milestones often reflect broader economic trends and investor sentiment.
The index has also captured major market events, including the crash of 1929, which saw the Dow plummet from 300 points to 77.90 over two years – a staggering 52.67% drop in 1931 alone. Such dramatic movements serve as stark reminders of the market’s volatility and its connection to wider economic conditions.
Global Influence and Kiwi Connections
While the Dow Jones Industrial Average focuses on American companies, its influence extends far beyond US borders. As a key indicator of global market health, the Dow’s movements can impact investor sentiment worldwide, including here in Aotearoa.
For Kiwi investors, keeping an eye on the Dow can provide valuable insights into global market trends. Many NZ-based fund managers and investment advisors consider the Dow’s performance when making decisions about international investments or assessing global economic conditions.
Moreover, some of the companies listed on the Dow have significant operations or investments in our country. For instance, Apple and Microsoft, both Dow components, have a substantial presence in the NZ tech market. Their performance on the Dow can indirectly affect local business conditions and consumer trends.
Criticisms and Limitations
Despite its prominence, the Dow is not without its critics. Some financial experts argue that its price-weighted calculation method and limited number of components make it less representative of the broader market compared to more comprehensive indices like the S&P 500.
Additionally, the Dow’s focus on large, established companies means it may not capture the dynamism of emerging sectors or smaller, innovative firms that are increasingly driving economic growth.
The Dow in the Digital Age
In recent years, the Dow has adapted to reflect the growing importance of technology and services in the global economy. In 1999, Microsoft and Intel became the first NASDAQ-listed companies to join the index. The inclusion of tech giants like Apple (added in 2015) and Salesforce (2020) further underscores this shift.
For Kiwi investors and businesses involved in tech and innovation, these changes in the Dow’s composition can provide valuable insights into global trends and potential opportunities in the tech sector.
The Dow Jones Industrial Average, with its rich history spanning over a century, remains a key barometer of global financial markets. While it may have originated across the Pacific, its influence resonates worldwide, including here in Aotearoa. For Kiwi investors and financial professionals, understanding the Dow’s history, composition, and movements can provide valuable context for navigating the increasingly interconnected world of global finance.
As we look to the future, the Dow will likely continue to evolve, reflecting changes in the global economy. Whether you’re a seasoned investor or simply interested in financial markets, keeping an eye on this venerable index can offer valuable insights into the pulse of the global economy and its potential impacts on our own financial landscape.