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.
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.
Source: Yahoo Finance
