Just as you take your patient’s vital signs to gauge their well-being or potential illness, the financial world looks to indexes to take the temperature of the country’s economic health. The oldest and most well-known is the Dow Jones Industrial Average, which is often abbreviated as DJIA or simply referred to as the Dow. It was founded in 1896 by Charles Henry Dow and Edward D. Jones as a way of identifying trends in the prices of stocks and bonds in the United States. They passed along an average of select stocks thought to best represent the market in a newsletter shared with investors.
The DJIA initially took the average of only 12 stocks and, according to Armstrong Economics, eventually became heavily weighted toward railroad stocks. At the time, this made perfect sense, because the delivery of goods was having a huge impact on the growing economy. The original 12, however, offer a peek into the history of a newborn American economy. The last of the originals, General Electric, was booted off the list in 2018 as detailed in an Industry Week article from that time.
Since its inception, the DJIA has swelled to 30 U.S. companies and represents all the major industry sectors except for transportation, utilities, and real estate (there are separate indexes for these areas of business).
According to the Wall Street Journal, the DJIA is determined through the summing of the 30 stocks in its index divided by a factor called the Dow divisor that helps to smooth over changes like stock splits and new stocks added to the index.
Physician investors should note that although the DJIA is a valuable tool in terms of reading the market, other, wider-ranging, and more diverse indexes should be consulted for a more complete market outlook. These include the S&P 500, which includes 500 of the country’s largest companies; the NASDAQ (ie, National Association of Securities Dealers Automated Quotations), which has many tech stocks; or the Wilshire 5000 Total Market Index, which is a market-capitalization-weighted index of the market value of all US stocks actively traded in the United States.
These indexes all contribute to an understanding of the market. In the end, nothing replaces sound valuation based on fact and a steady-handed investment strategy guided by trusted financial advisors.
