Why Investors Still Look at the Dow Jones First

With the recent 130th anniversary of the Dow, let’s take a closer look at why this old and narrow index still commands so much attention.

Until the S&P 500 began circulating in the 1950s – and then NASDAQ in the 1970s – the Dow was the most widely quoted measure of the market’s health each day, but it was not the first market index, or even the first “Dow” measure. Dow Jones & Company was founded in 1882, and its first index, widely known as the “Railroad Average,” was created in 1884 and consisted of 11 stocks, all but two of which were railroads.

The first Dow index was published daily in a news sheet that later became The Wall Street Journal, originally called Customer’s Afternoon Letter. In the mid-1890s, after these rails were “derailed” in the Panic of 1893, Dow Jones decided to diversify, so 12 industrial stocks were chosen to create a wider diversity:

• American Cotton Oil Company
• American Sugar Company
• American Tobacco Company
• Chicago Gas Company
• Distilling & Cattle Feeding Company
• General Electric
• Laclede Gas Company
• National Lead Company
• North American Utility Company
• Tennessee Coal & Iron
• U.S. Leather Company (preferred)
• U.S. Rubber Company

A quick survey of those 12 names makes it clear that most stocks don’t live forever. Only General Electric has remained on the list from 1896 until now – although GE was removed (and then reinstated) twice. Most of these 12 names were merged into other companies, which required Dow to adjust the index.

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The Dow numbers took on mystic powers, reflected in various phobias about crossing “barriers” like 1,000, 10,000, and now 50,000.  The Dow first reached 995 in 1966 and then retreated from the 4-digit barrier for six years. It first closed above 1,000 on November 14, 1972, but it took a decade to stay above 1,000.

The Dow first reached 10,000 on March 29, 1999, but it then took almost a decade to stay above 10,000.

Today, the S&P 500 is a much more broadly diversified market indicator for blue-chip stocks, comprising 11 major sectors and dozens of subsectors, while the Russell 2000 best reflects small stocks, and the NASDAQ seeks out tomorrow’s most promising emerging companies and sectors, notably technology. Yet most investors still look at the Dow first, wondering how many hundred points it gained or lost today.

Can the Dow Stay Above 50,000?

The question remains – will it take another decade for the Dow to stay above 50,000?  I’d say…No. The Dow will likely meet more resistance at six-digits – Dow 100,000 – perhaps sometime in the 2030s.

Here are the three major bear markets in the Dow in the last 100 years.

Data source&colon Stock Trader's Almanac

For balance, here are the three strongest bull markets in the Dow’s last century. In our nation’s 250-year history, we enjoyed essentially flat prices for nearly two centuries, before debauching our currency in 1965 (when LBJ ended silver coinage) and 1971 (when Nixon closed the gold window), leading to 10-fold price gains since 1967, but inflation was under control as long as the U.S. followed a gold standard.

Data source&colon Stock Trader's Almanac

So far in the 2020s, the Dow is up 172%, from a low of 18,760 in March 2020 to 50,600 now, so we may be able to cite another Roaring 20s decade at the end of 2029, but that depends on our political choices.

The Dow may be outdated and limited in scope, but I’m still waiting for the day when news reports lead with the S&P 500 (now at a rather mundane level of 7,500 or so) instead of citing the Daily Dow data.

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