Founded in 1885, the Dow Jones Industrial Average (DJIA) is one of the oldest stock indexes in the United States. It originally tracked stocks from 12 of the largest companies in the U.S. In 1928, the DJIA expanded to its current 30 stocks.
Over the years, companies on the DJIA have been replaced with other companies that are deemed to better reflect major industries in the U.S. economy. Companies selected for the DJIA must also have an excellent reputation and a history of solid financial growth. The DJIA’s goal is to act as a representative of the stock market as a whole and as a proxy for the overall health of the U.S. economy. Currently, its list of 30 stocks includes iconic companies such as Johnson & Johnson, Home Depot, Caterpillar, Apple, IBM, and McDonald’s.
Mark M. Grywacheski
Kevin Schmidt
The DJIA is often referred to as “your grandfather’s stock index.” This analogy represents a time when investing was much easier, when investors bought stocks in stable, “blue chip” companies. These trusted, established companies often paid investors a steady dividend. Investors would buy these stocks and often hold them for years, even decades. Some even hold these stocks for their entire lives.
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Today, the Dow Jones Industrial Average is struggling to maintain its relevance. Like horse-drawn carriages and oil lanterns, it represents a bygone era.
Over the past 25 years, the world, and the U.S. economy, has become increasingly complex. This makes it difficult for a 30-stock index like the DJIA to represent the breadth and scope of new industries and companies. By comparison, the S&P 500 index includes stocks from the 500 largest U.S. companies. Similarly, the NASDAQ index is made up of about 3,700 stocks and includes many of the biggest names in the rapidly expanding technology industry. The DJIA does not include many tech giants.
Despite its legacy as one of the world’s most recognized stock indexes, the DJIA began to lose its relevance in the late 1990s. As you may recall, this was the era of the early technology boom. The Internet, along with advances in computers, mobile phones, personal electronics, and e-commerce, helped transform the economy. Cutting-edge companies like Cisco, Oracle, Dell, EMC, and Applied Materials quickly became some of the most actively traded stocks on Wall Street.
But by the end of 1999, the Dow Jones Industrial Average was dominated by companies like Eastman Kodak, International Paper, Philip Morris, Minnesota Mining and Manufacturing, and The Goodyear Tire & Rubber Company. Not that these companies were bad, but the Dow Jones Industrial Average hardly represented the new economy that was increasingly influenced by technology and innovation.
Technology continues to play an ever-increasing role in driving economic growth and shaping the structure of our economy. The latest innovation is artificial intelligence (AI). Companies like NVIDIA, Alphabet (Google), Meta (Facebook), Broadcom, Palo Alto Networks, and Tesla, to name just a few, are some of the largest and most influential companies in the world. For investors, these companies are not listed on the DJIA; like many other major American companies, they are listed on the S&P 500 or NASDAQ stock indexes.
Mark Grywacheski is an expert in financial markets and economic analysis and an investment adviser with Quad Cities Investment Group in Davenport.
Disclaimer: Opinions expressed herein are subject to change without notice. Prices and quotes stated herein are indicative only and do not constitute an offer to buy or sell securities at any particular price. Information has been obtained from sources believed to be reliable, but no guarantee is made that the materials presented are accurate or provide a complete description of the securities, markets, or trends referenced. Quad-Cities Investment Group LLC is an investment adviser registered with the U.S. Securities and Exchange Commission.
