By Chris Dieterich
NEW YORK--As the Dow Jones Industrial Average reaches the
rarefied air above 14164.53, its composition is almost
unrecognizable from the collection of stocks assembled more than a
century ago, when Charles Dow first published the indicator of
stock-market prices that has morphed into the blue chips of
today.
Of that original lineup, the General Electric Co. (GE) is the
last stock standing.
Mr. Dow, the first editor of The Wall Street Journal and
co-founder of Dow Jones & Co., created the first average of
closing prices of active stocks to help explain stock-market
movements to his readers. Today, as then, the average provides a
tool for taking the temperature of the market as a whole by
aggregating stock prices of leading American companies.
"The average investor still thinks in terms of the Dow, almost
exclusively," said Julius Ridgway, investment adviser at Medley
& Brown, and investment advisory firm in Jackson, Miss. "Local
and national daily newscasts report 'stocks were up/down X points
today,' always referring to the Dow," he said.
Its first iteration averaged the closing prices of 11
stocks--nine railroads, along with Pacific Mail Steamship and
Western Union--and was first published on July 3, 1884, in the
Customer's Afternoon Letter, a two-page predecessor of The Wall
Street Journal.
This early indicator was published irregularly. It wasn't until
more than decade later that an average consisting entirely of
industrial stocks was first printed in the Journal, with daily
publication of this 12-stock industrial average beginning on Oct.
7, 1896.
While General Electric, originally known as Edison General
Electric Co., has withstood the test of time, it was delisted
twice--in 1898 and 1901. It has remained in the index since the
stock's reinstatement in 1907.
Nearly a decade after its inception, the measure notched its
first big performance milestone. The Dow first closed above 100 for
the first time on Jan. 12, 1906.
The industrial average expanded to 20 names in 1916, and
included firm that reflected the dominant industries of the era:
American Beet Sugar Co., Studebaker and Baldwin Locomotive Works.
American Telephone and Telegraph Co., an ancestor of today's
AT&T Inc. (T), made the list.
In 1928, it broadened into a constellation of 30 stocks, the
number that remains today. Included in 1928's round of additions
was Standard Oil (N.J.), the antecedent for current Dow component
Exxon Mobil Corp. (XOM).
The method for calculating the benchmark also changed in 1928.
Originally the average of each members' closing stock price, the
Journal's editors incorporated a "divisor" into their calculation
to adjust for the effects of stock splits and substitutions. A
divisor is still used today and is regularly modified so the
average maintains historical continuity.
The speculative market of the roaring 1920s pushed the Dow to a
peak of 381.17 on Sept. 3, 1929. But the measure withered in the
crash a month later, then languished through the Great Depression
that gripped the 1930s. The Dow bottomed at 41.22 on July 8, 1932,
down 89% from its 1929 high.
A wave of failed companies and mergers shook up the average
during the depression, but current Dow components Procter &
Gamble Co. (PG) and Standard Oil of California, now Chevron Corp.
(CVX), also joined the fray.
International Business Machines Corp. (IBM), then an
adding-machine company, was first included in 1932. It was dropped
again in 1939, and wouldn't reenter the Dow until 40 years later.
Coca-Cola Co. (KO) similarly joined in 1932, but was cut in 1935,
resurfacing again in 1987, where it remains today.
Post-World War II prosperity propelled the Dow, and it finally
topped its pre-Depression high in 1954, a full 25 years later. The
average topped 1000 for the first time on Nov. 14, 1972.
Current components Alcoa Inc. (AA) (formerly Aluminum Company of
America), DuPont (DD) and United Aircraft Corp. (now United
Technologies Corp. (UTX)) were by then members. Texaco Inc. (now
part of Chevron), also had joined the blue chips. Then-component
General Foods Corp. was later bought by Philip Morris Cos. and then
folded into Kraft Foods Inc., a Dow member until last year.
The Dow rattled in a range for much of the next decade amid the
"stagflation" of the 1970s. By the early 1980s, however, the blue
chips began what was an unprecedented ascent, fueled by a big and
prolonged decline in interest rates and lower inflation.
On Jan. 8, 1987, the Dow topped the 2000 mark, then broke
records at a furious pace in the years that followed. Even
so-called Black Monday, on Oct. 19, 1987 when the Dow plunged 23%
in a single day, couldn't hold the broader bull market back.
The Dow hit 3000 on April 17, 1991, and raced past 6000 on Oct.
14., 1996, the year it celebrated its 100th birthday.
The ascent of the 1980s and 1990s was a heyday for shareholders.
Dow investors would have notched an annual gain of 3.2% from the
turn of the twentieth century through 1981, according to data
provided by S&P Dow Jones Indices. From 1982 until the market
peak in 2000, investors reaped an annual gain of 15%.
The Dow cruised past 10000 on March 29, 1999, and topped out at
11722.98 on January 14, 2000.
By then, it had become far more representative of the broader
market than the original batch of so-called "smokestack" companies.
It had a presence in technology, including the likes of Intel Corp.
(INTC), Hewlett-Packard Co. (HPQ), IBM and Microsoft Corp. (MSFT).
Retailers like Home Depot Inc. (HD) and Wal-Mart Stores Inc. (WMT)
made the list, as did financials like J.P Morgan Chase & Co.
(JPM).
Stock investors were soon chastened by the dot-com bubble,
though, and it took another seven years for the Dow to reach its
then-all-time high of 14164.53, on Oct. 9, 2007, ahead of the
turmoil of the latest recession and financial crisis.
The Dow closed at a low of 6547.05 on March 9, 2009, but
reclaimed 10000 on Oct. 14, 2009, after jumping 50% in the seven
months after the market bottom.
While its ubiquity has helped keep the Dow in the financial
markets' lexicon, market participants say it has maintained its
relevance because of its ability to be nimble and adjust to changes
in American industry.
"The Dow has done an amazing job replicating what the overall
stock market has done," said Sam Stovall, chief equity strategist
at S&P Capital IQ. "I think it will always have a place in Wall
Street and Main Street discussions of the financial markets," he
said.
A handful of long-time Dow components have fallen off the
average since the 2007 high. Bank of America Corp. (BAC) and
Chevron replaced Altria Group Inc. (MO) and Honeywell International
Inc. (HON) in 2008.
The financial crisis itself stoked changes. Kraft Foods replaced
American International Group Inc. (AIG) in September 2008,
following the government's decision to take a nearly 80% stake in
the insurance giant in the wake of the subprime-mortgage crisis.
Cisco Systems Inc. (CSCO) and Travelers Cos. Inc. (TRV) replaced
General Motors Corp. (GM), a Dow component since 1925, and
Citigroup Inc. (C) in 2009. Both GM and Citi received government
aid during the financial crisis.
Last year, UnitedHealth Group Inc. (UNH) replaced Kraft after
the company spun off its North American grocery business and began
trading as Mondelez International Inc. (MDLZ).
Other stock indexes have proliferated since 1896. Some, like the
Standard & Poor's 500-stock index--a broader measure of the
biggest U.S. traded companies by market value--are widely followed
and quoted by financial-industry professionals. Stock strategists
often set their forecasts in terms of the S&P 500, for
instance. But some investors say the Dow's enduring position as the
means by which the bulk of Americans gauge the stock market remains
entrenched, as it has been for over a century.
"When we talk about the market in our office, and in most
offices of professional investors, we talk about the S&P 500,"
Mr. Ridgway said.
Yet the Dow remains "the proxy for the market for the average
investor, the casual observer," he said.
"When the Dow crosses 15000, or 20000, it will be celebrated on
every news outlet. When the S&P 500 crosses 2000, no one
outside the industry will even notice."
Write to Chris Dieterich at Chris.Dieterich@wsj.com