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Why DJIA struggles to mirror the US stock market

Why DJIA struggles to mirror the US stock market
Why DJIA struggles to mirror the US stock market

 


Founded in 1885, the Dow Jones Industrial Average (DJIA) is one of America's oldest stock indexes. It originally tracked the stocks of 12 major U.S. companies. In 1928, the DJIA expanded to 30 stocks, its current number.

Over the years, companies in the DJIA are often replaced by others considered to better reflect the major industries of the U.S. economy. Companies selected to be part of the DJIA must also have an excellent reputation and a history of strong financial growth. The purpose of the DJIA is to serve as a representative of the overall stock market and an indicator of the overall health of the U.S. economy. Today, this list of 30 stocks includes flagship companies such as Johnson & Johnson, Home Depot, Caterpillar, Apple, IBM and McDonalds.







Mark M Grywacheski

Mark M. Grywacheski


Kevin Schmidt



The DJIA is often referred to as your grandfather's stock index. The analogy harks back to a much simpler era of investing, when investors typically bought the shares of stable, blue-chip companies. These reliable, well-established companies often rewarded investors with a steady stream of dividends. Investors often bought and held these stocks for years or even decades. Some would keep these shares all their lives.

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Today, the DJIA is struggling to gain relevance. Like the horse and the oil lantern, it is the symbol of a bygone era.

Over the past 25 years, the world and the U.S. economy have become increasingly complex. Thus, it is difficult to represent the breadth and scope of new industries and companies within a 30-stock index such as the DJIA. For comparison, the S&P 500 index includes the stocks of 500 major U.S. companies. Similarly, the NASDAQ index is made up of approximately 3,700 stocks and includes many heavyweights from the growing technology sector. You won't find too many tech giants in the DJIA.

Despite its heritage as one of the most recognized stock indexes in the world, the DJIA began to lose relevance in the late 1990s. As you may recall, this was the time of the first boom technological. The Internet and advances in computers, cell phones, personal electronic devices, and e-commerce have fueled transformational change in our economy. Cutting-edge companies like Cisco, Oracle, Dell, EMC, and Applied Materials, among others, have quickly become some of the most actively traded stocks on Wall Street.

However, by the end of 1999, the DJIA index was filled with companies such as Eastman Kodak, International Paper, Philip Morris, Minnesota Mining & Manufacturing, and Goodyear Tire & Rubber Company. It's not that they were bad companies, but the DJIA 30 index was hardly representative of a new economy increasingly influenced by technology and innovation.

Technology continues to play an increasingly important 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 a few, are among the largest and most influential in the world. For investors, you will not find these companies listed on the DJIA. Like so many other large American companies, you will instead find them in the S&P 500 or NASDAQ stock indexes.

Mark Grywacheski is an expert in financial markets and economic analysis and is an investment advisor with Quad-Cities Investment Group, Davenport.

Disclaimer: Opinions expressed here are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any price. The information has been obtained from sources believed to be reliable, but we do not guarantee that the information presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. Quad-Cities Investment Group LLC is a registered investment advisor with the United States Securities Exchange Commission.

Sources

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2/ https://qctimes.com/news/local/business/mark-grywacheski-dow-jones-industrial-average-stock-market/article_163acc14-2ff9-11ef-9127-7b5194664a0d.html

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