The Dow Jones industrial average turned 110 today. In addition to helping promote the company and the Wall Street Journal, it’s played an important role in evaluating the stock market.
According to a press release put out by the Wall Street Journal’s parent, “‘The Dow’ is the world’s most frequently quoted and longest-serving market indicator of its kind, tracking the pillars of the U.S. economy since its creation by Charles Dow on May 26, 1896. The occasion was marked by the gathering of market leaders at the New York Society of Securities Analysts in New York and the unveiling of a survey that found an overwhelming 78% of the public know the Dow.”
Here is the press release.
Now, here is what Dow Jones doesn’t say about the index in its press release:
The successful Dow Jones industrial average was actually preceded by some stock listings that were not all that successful. In 1884, Dow compiled a list of nine railroad and two industrial stocks (among the companies were Western Union, the Union Pacific, the New York Central and the Louisville & Nashville railroads) and divided their prices by 11 to produce a stock market average. The average was first published on July 3, 1884.
Dow received complaints that the average was not representative of the overall market, so he refined his list, in 1885, 1886 and again in 1894. In 1896, The Journal published the first industrial stock average of 12 stocks, including General Electric, American Tobacco and American Sugar. The list would later be expanded to 20 stocks in 1916 and 30 stocks in 1928. In other words, the Dow Jones industrial average as we know it today has actually only been around for the last 88 years.
The average was also created at a time when other newspapers also had stock averages. For example, the New York Times used to have its own stock average. Stock averages compiled by newspapers were considered a way for the papers to write about what was going on in the stock market. It was only through savvy marketing and bullying that the Dow became the accepted average, and the other newspapers dropped their averages.
Today, a number of market experts would also argue that the Dow’s time has passed it by. A measure of 30 stocks is not the most accurate indicator of how the market is performing on a certain day. The S&P 500 and other averages are broader indicators.
