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Definition
The Dow Jones Industrial Average (The DJIA or The Dow) is the oldest of the American stock market index. The DJIA is calculated using the value of 30 large companies, that are widely held. The 30 companies used to compute the average change on occasion, and by definition do not include utlities and transportation companies. Originally, the average was computed by taking a sum of the price of each of the included stocks and then dividing the sum by the number of stocks, a pure average. Today, the DJIA is price-weighted rather than a pure average. This helps to preserve the DJIAs usefulness as a historical measurement. For most people, the DJIA is the primary statistic used to determine the health of the market.
Problems and Criticisms
The DJIA is not necessarily the best indicator of overall stock market performance. The stock for only 30 companies are included so there are thousands of companies whose performance is not used. Additionally, because all of the included companies have large market caps, companies will smaller market caps are not figured into the average. Additionally, stocks that are higher priced have more influence over the index because the index is price-weighted. There is no consideration for the size of the companies included. Finally, despite a global economy, the DJIA remains a US centric index.
DJIA Performance
On September 3rd, 1929, the Dow reached what was, at the time, an all-time high of 381.17. By July 8, 1932, the index closed at 41.22. This was in the midst of the Great Depression. Sadly, we are living through a similar period of wealth destruction in the stock market. The DJIA experienced a period of remarkable growth in the aftermath of the 1987 market crash. On October 19th, 1987, the Dow closed at 1,738.74. By the end of the Clinton Presidency the DJIA was over 10,000. The George W. Bush Presidency would experience two major slides in the DJIA. The first came in the first two years of the administration as the tech bubble burst. Their were many lessons to learn from the tech bubble, but the Bush administration wasn't interested in those lessons. So when the DJIA began to grow again and peaked at 14,164.53 in October of 2007, they made sure their heads were buried deep in the sand. Well, with the bust of the real estate bubble and the banking crisis, the Dow would take a severe hit and would be bear 8,000 as Bush left office.
Further ReadingPrevious Entries in this Series: GDP, Unemployment Rate, Poverty Rate, Inflation Rate, Gini Index
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