About this Episode
S&P Dow Jones Indices Senior Index Analyst Howard Silverblatt joins the Essential Podcast on the occasion of the Dow Jones Industrial Average's 125th birthday. The conversation covers the changing structure of The Dow over time, the history of the index, and the perceived competition with its younger sibling: the S&P 500.
The Essential Podcast from S&P Global is dedicated to sharing essential intelligence with those working in and affected by financial markets. Host Nathan Hunt focuses on those issues of immediate importance to global financial markets – macroeconomic trends, the credit cycle, climate risk, energy transition, and global trade – in interviews with subject matter experts from around the world.
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- Celebrate The Dow’s 125th anniversary. As of May 26, 2021, the Dow Jones Industrial Average will have been determining the flood tide of the market for 125 years. Created as a simple gauge of stock market performance, this financial and cultural icon has weathered recessions, depressions, bubbles, and expansions through 23 U.S. presidencies, two world wars, and two global pandemics. Through it all The Dow has steadfastly tracked the ups and downs of the U.S. market and by extension, served as a leading indicator of U.S. and global economic health. Quoted far and wide from Wall Street to Main Street, The Dow is still the number that most investors cite when asked how the market is doing.
Nathan Hunt: This month, the Dow Jones Industrial Average turns 125 years old. 'The Dow' as it is known, made its debut on May 26, 1896, as an average of 12 stocks, including a leather maker, a steel provider, and a sugar producer. In the last 125 years, The Dow has evolved and expanded to meet the changes in equity markets, but some people consider it less accurate and less valuable than its younger hipper sibling, the S&P 500. This is The Essential Podcast from S&P Global, my name is Nathan Hunt. I shall be defending the honor of the venerable and venerated Dow Jones Industrial Average. In this task, I am joined by Howard Silverblatt, the senior index analyst at S&P Dow Jones Indices, a man in his fifth decade of working on The Dow. Howard Silverblatt, welcome to The Essential Podcast.
Howard Silverblatt: Thank you.
Nathan Hunt: You have been called by no less, 'an authority', by The Wall Street Journal and I'm quoting here, "the high priest, historian, and keeper of the index business." How does one become a high priest of indices? What's the career path there?
Howard Silverblatt: It's the same as how do you get to Carnegie Hall. I've been an S&P for 44 years and I've watched on from all those before me. Over that time period, the indices are developed from a handful of people from when I first started to a full global enterprise today. And what used to be a smoke-filled backroom of money managers, now includes the average person on the street who can research and invest literally on a cell phone. Investing has totally changed and we've changed over that time. We've learned how to do it. When I started, I need a form of ID to open up a brokerage account and it took me a week. Now it's instant. I think the key to your question is that you need to know your objective and where you want and need to be and as long as you know, and learn your business, you can maneuver around any obstacle to get there.
Nathan Hunt: We're talking about the Dow Jones Industrial Average. As a young kid, I remember Walter Cronkite on the news talking about The Dow. I want to ask my dad what The Dow was and he told me it's a thing about stocks. My dad is a smart man, but I have a feeling that answer may have been insufficient. So what is The Dow?
Howard Silverblatt: The Dow is the snapshot of the economy. By looking at key selected, publicly-traded issues to give you a high-level view of how things are going on in the market. Specifically, it's 30 issues. You add them up and divide them by a divisor. It's simple and straightforward and those simple results give you an informative and useful tool about what's happening in the market. As far as your dad, he was right, it is a thing about stocks and stocks about the health of the economy, which is what The Dow is telling you. And as Uncle Walter would say, that's the way it is.
Nathan Hunt: As a resident historian, you are no doubt aware that The Dow was originally created by Charles Dow, who was the editor of the Wall Street Journal, along with the statistician Edward Jones. Why did they create this thing?
Howard Silverblatt: That was back in the 1980s and nineties and The Dow industrialized itself in the 1990s. And just as today, there was a need to measure what was happening in a market which investors could use. So in 1896, he created it. So after 12 issues, which at the time we see to be representative of the market, they figured out a formula that could quantify those 12, combining them together to easily give investors a snapshot of what was happening in the market and then eventually added history to it. It became a tool for investors to use and a benchmark to be measured against. Did you beat The Dow, did you not? And if so, why? So again, the reason that it was created back then is the same reason today. You need to know what's happening in a market and you need to have a reliable methodology-based way to measure that.
Nathan Hunt: One detail I think a lot of folks don't realize about indices is that they are weighted and factored. You can't just take the 30 biggest companies in the U.S. and call it a day. You have to do some things to make that a truer reflection of the market. Has waiting and factoring always been part of The Dow?
Howard Silverblatt: No, and definitely not if you look at the way it's done today. Originally The Dow was an average. And again, you add it up and you divide it. Then in 1928, it became an index when The Dow 20 became The Dow 30 and here's when a key item happened, a divisor was added. The divisor was a key methodology change. It stabilized the membership if you added or deleted someone causes you don't gain owes money just as the capital changes and permitted a wider use and research. So it is actually an index now, but it was an average back then. The name average back then was not removed since it was part of the investing environment. But by 1928, I guess marketing was as much well back then, as it is today. Dow's methodology is a lot simpler than most of the other industries, whether it's from S&P or someone else.
Nathan Hunt: Looking back at the history of The Dow, it occurs to me that Edward Jones, the statistician might've been more important for the construction of the Dow Jones Industrial Average than Charles Dow, the newspaper editor, should this maybe have been called the Jones Dow industrial average?
Howard Silverblatt: Well, as a number cruncher, I definitely identify more with the statistician side. But no, Charles Dow, again, in my view and opinion, working back to the beach, he knew the market. He knew what reporting was, and he knew what the market needed, so he created something. Edward Jones helped develop that beach. He made it more useful and expanded to choose. You can't have one without the other, atleast not if you want to survive. So again, Dow started it and, and Edwards helped find and permitted it to go on. Again, the use of the devices and everything going forward with major changes and we've had many more since those. But I would have to go with The Dow Jones as compared to Jones Dow.
Nathan Hunt: In the nature of any index that as the markets change, the index is reweighted and re-evaluated, companies move in, companies move out. How often does that happen with The Dow?
Howard Silverblatt: Not that much on The Dow. Membership changes are made on an as-needed basis. The devices get adjusted, the staff supports the capital changes, but there's no fully waiting for either for the membership or the actual waiting of the company, how much you can do, and there are no restrictions of how much you can grow to. The Dow's a small group of stocks and the membership doesn't change that often other than divisors. It's pretty stable on the issues in there.
Nathan Hunt: What has the historical trend been on that stability? The companies moving in, moving out of The Dow. There's a perception in markets in general that the speed of change is increasing. Do you see that with the member companies of The Dow?
Howard Silverblatt: Yes. Historically, turnover has not been high. I mean, to go from 12 to 20 to 30, but over that 40 year period only eight changes. That said, The Dow would flux the market and the economic changes have sped up as have the changes in The Dow to reflect that. So membership change is currently higher than it has been historically, which it needs to do to keep up with the market and the economy, which is changing at a faster pace than it has over the last 125 years.
Nathan Hunt: There is a sense when you talk to some people in the markets that The Dow is less useful as an indicator or a benchmark than it once was. I think part of that has been the massive success of the S&P 500, which covers 500 of the biggest companies instead of 30. What do you make of the claim that measuring using 30 companies is too few nowadays?
Howard Silverblatt: Well, The Dow was then again, the first one on there. They basically took the beach, but that was 125 years ago. And there's a lot more competition and the ability to calculate and formula. Remember 125 years ago, you had to add up the numbers, physically, add them up and start dividing. There was no calculator. There was not 500 that you were going to able to use shares and flow to different sectors and stuff. So of 125 years, however, it's amazing over that time period that The Dow still tracks the market and the S&P 500, and therefore it's still relevant. I should know, over the shorter term, you know, the variants, the S&P and The Dow can be watched because of the weighting. In The Dow, a single issue can have a much broader impact. Overall, The Dow remains a key indicator to the average person on the street, which is also important. It's easy to understand if you name the issues to someone on the street and I don't mean more, I mean, just main street, anywhere they would know the company, probably be able to tell you what they do. From an investment point of view, I'd have to agree. It's not as extensive or diversified as the S&P 500. So it doesn't attract as much investment or benchmarking, but it's really companies and it's works investors and the general public for 125 years and done a good job. Otherwise, it wouldn't be here.
Nathan Hunt: To that point as I was coming into the office this morning, Howard, I took the elevator up and it had one of those screens that they feature in elevators, nowadays, and there I saw or listening for the current value of The Dow. So, the Dow Jones Industrial Average remains a compelling and highly visible index today. Most people would consider it the most famous and successful index in the world. What do you think the future holds for The Dow? Will there be a 250th anniversary?
Howard Silverblatt: As a demise of capitalism, it will be here, but it will definitely be different. Size, structure, factors, re-weighting that we discussed. I mean all these things are going to somehow come into play and change what The Dow will be at 137 years old. In 1884 It was all about whereabouts, that's when The Dow transportation started, then there is 125 years ago, it was the industrials which came into play, and now it's technology and communication. So it's hard to say, you know, what will be in 25 years, much less, a hundred twenty-five years. But shorter-term a lot easier to say, you know, the economy is re-opening and both personal and work lives are starting to get back to, you know, whatever the new normal will be, as will spending both personal and co-op and The Dow is going to need to change to reflect that. So I would expect more membership changes in the short run and change is constant. As far as structural ones, if the market massively changes in structure, the index, at some point we'll need to do it. But short term, the index needs to reflect what the market is doing and in order to do that. It needs to change its membership and since the market is changing so quick, I would expect membership change to increase.
Nathan Hunt: Howard. I want to thank you for coming on today. I want to thank you for answering my questions. It is such a pleasure to talk to you.
Howard Silverblatt: Thank you for having me.
Nathan Hunt: The Essential Podcast is produced by Molly Mintz with assistance from Kurt Burger and Lundon Lafci. At S&P Global, we accelerate progress in the markets by providing intelligence that is essential for companies, governments, and individuals to make decisions with conviction. I am Nathan Hunt, thank you for listening.
The Essential Podcast is edited and produced by Molly Mintz.