“A person watching the tide coming in, and who wishes to know the spot which marks the high tide, sets a stick in the sand at the points reached by the incoming waves until the stick reaches a position to where the waves do not come up to it, and finally recede enough to show that the tide has turned. This method holds good in watching and determining the flood tide of the stock market. The average of [stock prices] is the peg which marks the height of the waves. The price-waves, like those of the sea, do not recede all at once from the top. The force which moves them checks the inflow gradually, and time elapses before it can be told with certainty whether high tide has been seen or not.”— Charles Dow, creator of the Dow Jones Industrial Average, in the January 31, 1901, edition of The Wall Street Journal
As of May 26, 2021, the Dow Jones Industrial Average has 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.
The Dow and the World Around It
The Dow Jones Industrial Average made its debut on May 26, 1896. It was the brainchild of Charles Dow, the tall, bearded, and unassuming journalist who cofounded Dow Jones & Co., publisher of The Wall Street Journal. Dow’s partner, Edward Jones, also has his name attached to the average, but he had nothing to do with its creation.
The Dow was initially made up of 12 stocks (versus 30 today), including a leather-maker, a steel provider, and a sugar producer. It was calculated by adding up the prices of the component stocks and dividing the sum by a divisor.
The Dow Jones Industrial Average wasn’t Mr. Dow’s first foray into measuring the market. In 1884 he produced an average of 11 stocks, mainly railroad companies. This market indicator was intermittently published in the “Customer’s Afternoon Letter,” a precursor to The Wall Street Journal.
But Dow believed that the rails only presented a partial picture of the economy and that industrial companies—whose stocks were considered highly speculative at the time—were crucial contributors to America’s growth. Since the goods produced by the industrials were being delivered by the railroads, Dow reasoned that two separate measures could confirm broad market trends. The Wall Street Journal began publishing the industrial average and the railroad average in every issue and has done so ever since. (With airplanes and trucks bringing competition to the railroads, the components of the railroad index evolved to reflect the changing landscape and, in 1970, the railroad average was renamed the Dow Jones Transportation Average™.)
At the time of The Dow’s introduction, investing in the stock market was considered a highly speculative activity. And so in its early years, The Dow achieved little prominence outside the narrow canyon of Wall Street. By the 1920s, however, ordinary citizens began investing in stocks, driving the industrial average from the 100 range in 1924, up to nearly 400 before the Crash of 1929. Ironically, it was the market’s fall that brought The Dow’s reputation to the attention of everyday investors as the index lost nearly 30% of its value over the course of two days. Before that, investors had been more focused on their individual stocks, but after the crash investors were more interested in following general market conditions. The Dow made that possible.
Since its early days the index has evolved with the U.S. economy, adding or eliminating companies as industries have gained or lost favor in the market. Despite those changes, one of The Dow’s original components, General Electric, remained in the iconic index until as recently as 2018. Through its historical continuity The Dow connects us to our financial past and offers valuable lessons, while also reflecting the current state of the market to millions of investors around the world each day. It doesn’t get closer to Charles Dow’s original vision than that.
S&P DJI Senior Index Analyst Howard Silverblatt joins the Essential Podcast on the occasion of the DJIA'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.