Dow Jones Industrial Average.

Ever heard someone mention "the Dow" and wondered what it actually is? Get ready to demystify this financial heavyweight, because we're taking a closer look at the Dow Jones Industrial Average (DJIA), a name that echoes through Wall Street and beyond. Often just called "the Dow," this isn't just some random list of stocks; it's one of the oldest and most-watched market indexes in the world, a barometer of sorts for the U.S. economy. But what exactly does it measure, and why is it so important? Buckle up, because we're about to dive in!

The DJIA is an index comprised of 30 prominent companies listed on U.S. stock exchanges. Now, you might be thinking, "30 companies? That's it?" Well, yes. And that's one of the reasons some financial pros see it as an incomplete view of the market – unlike broad indices like the S&P 500, which includes 500 companies, the Dow focuses on a relatively small group of large, well-established players. Also, the DJIA is "price-weighted", which is different to other indices like the Nasdaq Composite or the S&P 500 which uses "market capitalization".

The history of the Dow goes back to May 26, 1896. It was created by Charles Dow, the co-founder of both The Wall Street Journal and Dow Jones & Company, along with his business partner, statistician Edward Jones (hence, Dow Jones!). These pioneers created a way to track market movements, and their creation endures today, albeit in a refined form.

How is it calculated? The value of the index is basically the sum of the stock prices of the companies that it includes, divided by a number (a “factor” that is around 0.163 in November of 2024). It might seem complex, but the key is that the "factor" is adjusted whenever there is a stock split, in order to keep the overall value of the index consistent. Now, the index is maintained by S&P Dow Jones Indices, and a committee is in charge of selecting the 30 companies included in the DJIA. Additionally, the 10 companies in the index with the highest dividend yields are known as "the Dogs of the Dow".

Like all stock prices, the value of the DJIA can be affected by many things, like how the companies themselves are doing and broader economic trends. So whether you're a seasoned investor or simply curious about the stock market, understanding the Dow is key.

So, are you ready to unravel the mysteries of this iconic stock market index? Let's explore the world of the Dow Jones Industrial Average!

History

1880s-1930s: Navigating Early Economic Storms

The Dow Jones Industrial Average (DJIA), a key indicator of the health of the U.S. economy, has a long and complex history. When it was first published in the mid-1880s, the index stood at a level of 62.76. It experienced initial volatility, reaching a peak of 78.38 during the summer of 1890, but then plummeted to its all-time low of 28.48 in the summer of 1896 during the Panic of 1896. Many of the most significant percentage price movements in the Dow occurred early in its history, as the nascent industrial economy was still developing and maturing, which reflected the unstable nature of the economy of that time. In the 1900s, the Dow's momentum stalled as it navigated through two financial crises: the Panic of 1901 and the Panic of 1907. The Dow remained range-bound between 53 and 103 until late 1914. The negative impact of the 1906 San Francisco earthquake did little to improve the economic climate, and the index only broke 100 for the first time in 1906.

At the start of the 1910s, the Panic of 1910–1911 stifled economic growth. On July 30, 1914, with the average at 71.42, the decision was made to close the New York Stock Exchange, and suspend trading for four and a half months, reflecting the uncertain environment of the time. Some historians believe the exchange was closed due to concerns that markets would plunge in response to panic over the start of World War I. An alternative explanation is that the United States Secretary of the Treasury, William Gibbs McAdoo, closed the exchange to conserve the U.S. gold stock in order to launch the Federal Reserve System later that year, ensuring the United States could adhere to the gold standard. When the markets reopened on December 12, 1914, the index closed at 74.56, a gain of 4.4%. Although this is frequently reported as a large drop, due to the use of a later redefinition, reports from the time indicate that the day was positive, showing the importance of keeping the context in mind when looking at historical data. Following World War I, the United States experienced another economic downturn, the Post–World War I recession. The Dow's performance remained relatively unchanged from the closing value of the previous decade, adding only 8.26%, from 99.05 at the beginning of 1910 to a level of 107.23 at the end of 1919, underscoring the difficulties of that period.

The Dow experienced a long bull run from 1920 to late 1929, rising from 73 to 381 points. In 1928, the components of the Dow were increased to 30 stocks near the economic height of that decade, which was nicknamed the Roaring Twenties. This period downplayed the influence of the Depression of 1920–1921 and certain international conflicts such as the Polish–Soviet War, the Irish Civil War, the Turkish War of Independence, and the initial phase of the Chinese Civil War, demonstrating how global instability can have a minimal effect on stock markets. After reaching a peak of 381.17 on September 3, 1929, the bottom of the 1929 crash came just two months later on November 13, 1929, at 195.35 intraday, closing slightly higher at 198.69. The Wall Street Crash of 1929 and the ensuing Great Depression over the next several years saw the Dow continue to fall until July 8, 1932, when it closed at 41.22, roughly two-thirds of its mid-1880s starting point and almost 90% below its peak, highlighting the devastating effect of the crash. However, the Dow still ended the 1920s decade with a healthy 131.7% gain, rising from 107.23 to 248.48 at the end of 1929. In inflation-adjusted numbers, the high of 381.17 on September 3, 1929, was not surpassed until 1954, underscoring the lasting effect of the Great Depression.

Marked by global instability and the Great Depression, the 1930s contended with several consequential European and Asian outbreaks of war, leading to the catastrophic World War II in 1939. Other conflicts during the decade which affected the stock market included the 1936–1939 Spanish Civil War, the 1935–1936 Second Italo-Abyssinian War, the Soviet-Japanese Border War of 1939, and the Second Sino-Japanese War of 1937, demonstrating the connection between political instability and the stock market. The United States also experienced the Recession of 1937–1938, which temporarily halted the economic recovery. The largest one-day percentage gain in the index happened in the depths of the 1930s bear market on March 15, 1933, when the Dow gained 15.34% to close at 62.10, illustrating the potential for rapid gains even in downturns. However, as a whole throughout the Great Depression, the Dow posted some of its worst performances, resulting in a negative return for most of the 1930s for both new and old stock market investors. For the decade, the Dow Jones average fell from 248.48 at the beginning of 1930 to a stable level of 150.24 at the end of 1939, a loss of about 40%, highlighting the devastating impact of the depression.

1940s: Post-War Recovery and Renewed Optimism

The 1940s witnessed a period of significant recovery and growth for the Dow Jones Industrial Average (DJIA). Post-war reconstruction, coupled with a renewed sense of optimism for peace and prosperity, led to a 33% surge in the Dow, from 150.24 to 200.13. This strong performance occurred despite the Recession of 1949 and various global conflicts, highlighting the resilience of the market in the face of adversity and the overall optimism of the market in the new global landscape.

1950s: Defying Global Tensions with Remarkable Growth

Despite the backdrop of the Korean War and the ongoing Cold War, the Dow Jones Industrial Average (DJIA) experienced remarkable growth during the 1950s. A nearly 240% increase in the average, from 200.13 to 679.36, ensued over the course of that decade, demonstrating the strength and resilience of the market even amid global tensions.

1960s: A Decade of Muted Growth

The Dow Jones Industrial Average (DJIA) began to experience a slowdown during the 1960s, as the markets navigated through the Kennedy Slide of 1962. Despite this period of market volatility, the Dow still managed to achieve an 18% gain, increasing from 679.36 to 800.36 over the course of the decade, showcasing its limited progress in a period of economic and political change.

1970s: A Decade of Economic Turmoil

The 1970s marked a period of economic uncertainty and troubled relations between the U.S. and certain Middle Eastern countries. The 1970s energy crisis was a prelude to a difficult economic climate characterized by stagflation, the combination of high unemployment and high inflation, making it a turbulent decade for the stock market. However, on November 14, 1972, the average closed at 1,003.16, surpassing the 1,000 mark for the first time during a brief rally amidst a lengthy bear market, which demonstrated the potential for growth even amidst difficulties. Between January 1973 and December 1974, however, the average lost 48% of its value in what became known as the 1973–1974 stock market crash, closing at 577.60 on December 6, 1974, marking a significant downturn. This nadir came after prices had dropped more than 45% over two years since the NYSE's high point of 1,003.16 on November 4, 1972, highlighting the extreme volatility of the market during this period. In 1976, the index reached 1,000 several times, and it closed the year at 1,004.75, showing a gradual recovery. Although the Vietnam War ended in 1975, new tensions arose towards Iran surrounding the Iranian Revolution in 1979, adding to the global instability. Performance-wise for the 1970s, the index remained virtually flat, rising just 4.8% from 800.36 to 838.74, making it a largely stagnant period for the Dow and stock market investors.

1980s: A Decade of Volatility and Significant Gains

The 1980s began with the challenges of the early 1980s recession. In early 1981, the Dow Jones Industrial Average (DJIA) briefly broke above 1,000 several times, but then retreated, highlighting the market's early struggles. After finally closing above 2,000 in January 1987, the largest one-day percentage drop in the index's history occurred on Black Monday, October 19, 1987, when the average plummeted by 22.61%. No clear reasons were given to explain this sudden crash, underscoring the unpredictable nature of market fluctuations.

On October 13, 1989, the Friday the 13th mini-crash, which initiated the collapse of the junk bond market, resulted in a loss of almost 7% of the index in a single day, demonstrating the potential for contagion in the financial system.

Despite these dramatic market crashes, Silver Thursday, the early 1980s recession, the 1980s oil glut, the Japanese asset price bubble, and other political distractions, the Dow experienced remarkable overall growth during the 1980s. The index increased by 228%, from 838.74 to 2,753.20, showcasing a period of significant gains despite the underlying volatility. In fact, the index only had two negative years during the 1980s: in 1981 and 1984, further highlighting the overall positive trend of the market throughout the decade.

1990s: The Dot-Com Boom and a Decade of Unprecedented Growth

The 1990s brought about rapid advances in technology, along with the emergence of the dot-com era, which reshaped the global economy and stock markets. The markets had to contend with the 1990 oil price shock, which was compounded by the effects of the early 1990s recession, and a brief European situation surrounding Black Wednesday, which highlighted the complexity of the global financial system. Various influential foreign conflicts, such as the 1991 Soviet coup d'état attempt, which took place as part of the initial stages of the Dissolution of the Soviet Union, and the Revolutions of 1989; the First Chechen War and the Second Chechen War, the Gulf War, and the Yugoslav Wars, failed to dampen the economic enthusiasm surrounding the ongoing Information Age and the "irrational exuberance" (a phrase coined by Alan Greenspan) of the dot-com bubble, demonstrating the power of market optimism to overshadow global tensions. Between late 1992 and early 1993, the Dow staggered through the 3,000 level, making only modest gains as the biotechnology sector suffered through the downfall of the Biotech Bubble, with many biotech companies experiencing rapid share price increases followed by dramatic declines to new all-time lows, illustrating the volatility of the market when a bubble pops.

The Dow soared from 2,753 to 8,000 between January 1990 and July 1997, showcasing the strong market momentum during this period. However, in October 1997, the events surrounding the 1997 Asian financial crisis plunged the Dow into a 554-point loss to a close of 7,161.15, a retrenchment of 7.18% in what became known as the October 27, 1997 mini-crash, demonstrating the ripple effects of global financial crises.

Despite the negativity surrounding the 1998 Russian financial crisis, along with the subsequent fallout from the 1998 collapse of Long-Term Capital Management due to bad bets placed on the movement of the Russian ruble, the Dow continued climbing past 9,000, highlighting its resilience.

On March 29, 1999, the average closed at 10,006.78, its first close above 10,000. This milestone prompted a celebration on the New York Stock Exchange trading floor, complete with party hats, reflecting the excitement of the market at the time. Total gains for the decade exceeded 315%, rising from 2,753.20 to 11,497.12, which equates to an impressive 12.3% annually, showcasing a period of unprecedented growth in the stock market.

The Dow averaged a 5.3% return compounded annually for the 20th century, a record Warren Buffett called "a wonderful century," when he calculated that to achieve that return again, the index would need to close at about 2,000,000 by December 2099, underscoring the remarkable performance of the market in the 20th Century.

2000s: Navigating the Dot-Com Bust and the Financial Crisis

The 2000s began with a sharp reminder of market volatility. On September 17, 2001, the first day of trading after the September 11 attacks on the United States, the Dow Jones Industrial Average (DJIA) fell by 7.1%, reflecting the immediate impact of the tragedy on investor confidence. However, the Dow began an upward trend shortly after the attacks, regaining all lost ground and closing above 10,000 for the year, showcasing the resilience of the market. In 2002, the Dow dropped to a four-year low of 7,286 on September 24, 2002, due to the stock market downturn of 2002 and lingering effects of the dot-com bubble, demonstrating the lasting impact of the previous financial crisis. While the NASDAQ index fell roughly 75% and the S&P 500 index fell roughly 50% between 2000 and 2002, the Dow only fell 27% during the same period, illustrating its relative stability in the face of extreme market turbulence. In 2003, the Dow held steady within the 7,000 to 9,000-point level and recovered to the 10,000 mark by the end of the year, reflecting a gradual market recovery.

The Dow continued to climb, eventually reaching a record high of 14,198.10 on October 11, 2007, a mark that wasn’t surpassed until March 2013, demonstrating the slow but consistent growth of the market. However, this peak was followed by a significant drop over the next year due to the 2007–2008 financial crisis.

On September 15, 2008, a wider financial crisis became evident after the Bankruptcy of Lehman Brothers, along with the economic impact of record-high oil prices that had reached almost $150 per barrel two months earlier. The Dow lost more than 500 points for the day, returning to its mid-July lows below 11,000, underscoring the severity of the crisis. A series of bailout packages, including the Emergency Economic Stabilization Act of 2008, proposed and implemented by the Federal Reserve and United States Department of the Treasury, did not prevent further losses. After nearly six months of extreme volatility, during which the Dow experienced its largest one-day point loss, largest daily point gain, and largest intraday range (of more than 1,000 points) at the time, the index closed at a new 12-year low of 6,547.05 on March 9, 2009, its lowest close since April 1997. The Dow had lost 20% of its value in only six weeks, highlighting the dramatic scale of the market's downturn.

Towards the latter half of 2009, the average rallied towards the 10,000 level amidst optimism that the Great Recession, the United States housing bubble, and the 2007–2008 financial crisis were easing and possibly coming to an end, reflecting a return of confidence in the market. However, for the decade as a whole, the Dow saw a rather substantial pullback, resulting in a negative return from 11,497.12 to 10,428.05, a loss of about 9.3%, demonstrating the overall negative effect of the early 2000's financial problems and the 2007-2008 crisis in the markets.

2010s: Recovery, Volatility, and a Decade of Growth

During the first half of the 2010s decade, aided by the Federal Reserve's loose monetary policy, including quantitative easing, the Dow Jones Industrial Average (DJIA) made a notable rally attempt. This was despite significant volatility arising from growing global concerns such as the European debt crisis, the Dubai World 2009 debt standstill, and the 2011 United States debt-ceiling crisis, demonstrating the complex interplay between market forces and global events.

On May 6, 2010, the Dow experienced a dramatic intraday plunge, losing 9.2% of its value, but then regained almost all of it within a single hour. This event, which became known as the 2010 Flash Crash, highlighted the market's vulnerabilities and sparked new regulations to prevent future incidents, underscoring the importance of robust market oversight.

Six years after its previous high in 2007, the Dow finally closed at a new record high on March 5, 2013, reflecting a significant milestone in the market's recovery. It continued to climb for the next several years, surpassing 17,000 points until a brief 2015–2016 stock market selloff in the second half of 2015. The market then rebounded in early 2016 and climbed past 25,000 points on January 4, 2018, further showcasing the market's strong momentum.

On November 9, 2016, the day after Donald Trump's victory over Hillary Clinton in the U.S. presidential election, the index soared, coming within roughly 25 points of its all-time intraday high to that point, underscoring the influence of political events on market behavior.

Volatility returned in 2018 when the Dow fell nearly 20%, demonstrating the inherent risk and instability of the stock market. However, by early January 2019, the index had quickly rallied more than 10% from its Christmas Eve low, highlighting the market's capacity for sharp reversals.

Overall in the 2010s decade, the Dow increased from 10,428.05 to 28,538.44, representing a substantial gain of 174%, illustrating a period of significant growth despite the volatility.

2020s: Pandemic Volatility and Continued Growth

Despite the emergence of the COVID-19 pandemic, the Dow Jones Industrial Average (DJIA) continued its bull run from the previous decade, peaking at 29,551.42 on February 12, 2020 (29,568.57 intraday on the same day), reflecting the market's initial momentum. However, the index slowly retreated for the remainder of the week and into the next week, before coronavirus fears and an oil price war between Saudi Arabia and Russia sent the index into a tailspin. This period was marked by several days of losses (and gains) of at least 1,000 points, a typical symptom of a bear market, as previously seen in October 2008 during the 2007–2008 financial crisis, demonstrating the volatility and fragility of the market in the face of uncertainty. Volatility rose to such high levels that it triggered multiple 15-minute trading halts, highlighting the need for circuit breakers during times of market distress. In the first quarter of 2020, the DJIA fell 23%, its worst quarter since 1987, underscoring the severity of the initial market reaction to the pandemic.

The market recovered in the third quarter, returning to 28,837.52 on October 12, 2020, and briefly reached a new all-time high of 29,675.25 on November 9, 2020, at 14:00 ET, following that day's announcement of the success of the Pfizer–BioNTech COVID-19 vaccine in Phase III clinical trials, demonstrating how news related to the pandemic directly affected the market. The Dow (as reported by the United Press International) closed over 30,000 on December 31, 2020, at a record 30,606.48, signaling a strong recovery from the pandemic-induced lows. On November 24, following news that the presidential transition of Joe Biden was approved, the Dow increased by more than 500 points, closing at 30,046.24, further illustrating the link between political and economic events. On January 22, 2024, the Dow Jones crossed 38,000 points for the first time, and then, just a month later it surpassed 39,000; and in May, it surpassed 40,000 points, demonstrating the overall bull market of the early 2020's.

Conclusion

Alright, we've taken a wild ride through the history of the Dow Jones Industrial Average (DJIA), haven't we? From its humble beginnings in the late 1800s to the dizzying heights of the 2020s, the DJIA has been a constant witness—and often a participant—in major economic and global events.

As we’ve explored, this isn’t just some dusty relic of financial history. The DJIA has danced with the Roaring Twenties, plunged during the Great Depression, navigated through the chaos of multiple wars, and even felt the shockwaves of the dot-com bubble. From the 1970s energy crisis to the Black Monday crash of the 80s, the 2008 financial crisis and the recent COVID-19 pandemic, we can see how the DJIA reflects both the optimism and the anxieties of the times. We’ve witnessed the impact of quantitative easing and even seen how something as seemingly disconnected as a presidential election, such as the U.S. presidential election where Donald Trump beat Hillary Clinton, can move the market. It's been a rollercoaster for sure!

The DJIA is more than just a number; it's a story. It's a narrative of innovation, setbacks, resilience, and the ever-changing economic climate. By understanding its past, we can gain valuable insight into the factors that shape our financial world. Even today, the DJIA continues to make history and shows us that the market is always evolving. From crossing the 30,000-point mark in 2020 to passing 40,000 in 2024, this index continues to be a crucial indicator of the overall market.

So, whether you’re an experienced investor, just starting out, or simply curious about the forces that shape our economy, keeping an eye on the Dow Jones Industrial Average remains essential. It's a key to understanding both the past and potentially predicting the future of our financial markets.