NEW YORK — Unfurl the streamers. Ignite the fireworks. The Dow Jones industrial average (DJIA) is turning 100 years old this weekend. This is a spry centenarian. Despite scores of competing indexes - many of them far more comprehensive - the Dow remains the world's most widely followed stock-market barometer.
Nor are the keepers of the Dow - the editors of The Wall Street Journal - resting on their laurels. They are upgrading a new global index that tracks stock markets in some 28 countries.
The Dow first appeared back on May 26, 1896 - the idea of journalist Charles Henry Dow, who along with Edward Jones, formed Dow Jones & Co., which publishes The Wall Street Journal and Barron's magazine, among other publications.
The index was first made up of 12 "smokestack" companies, most of which have long since disappeared as recognizable corporate names. In 1916, the number rose to 20 and in 1928 to 30, the same number that appears today. But the only prominent name in the current index that was there 100 years ago is the General Electric Company. Over the years the Dow has also expanded from being a roster of just "industrial" firms to include "service" companies, such as McDonald's and American Express.
The Dow is an important index because it provides "for continuity over time," says Roger Huang, a finance professor at Vanderbilt University, in Nashville. The index allows us "to link together the past and the present," Professor Huang says. Yet, he adds, the index has actually had "a declining importance" in recent years among most stock-market technicians and academics compared with more detailed measurements such as the Standard & Poor's (S&P) 500 index, which originated in the mid-to-late 1920s.
How the Dow is computed
The reason is found in the way the Dow is computed. The Dow is made up of 30 "Blue-Chip" stocks, among them AT&T, IBM, Alcoa, Bethlehem Steel, General Motors, and Sears, Roebuck.
But the Dow is an unweighted measurement. Statistically, each company is treated roughly the same. The prices of the 30 stocks are totaled and divided by a regularly adjusted divisor, currently 0.33839549. Thus, when one company's stock has a bad day, such as happened to IBM recently, the whole index is rocked.
By contrast, the S&P 500 is weighted. Each company in the 500 index is given a placement by market capitalization, which is stock price times the number of shares outstanding. So S&P 500 stocks have an impact on their index in proportion to their importance in financial markets.
"In terms of popularity, the Dow usually turns up on the 6 o'clock news," says David Blitzer, chief economist for Standard & Poor's Corp. Much of the Dow's success is "happenstance," he says. "The first guy in gets a solid foothold, and it's hard to dislodge that person."
Most indexes tend to move in the same direction, Mr. Blitzer says.
Still, there is no denying the Dow's success, says Roger May, a Dow Jones spokesman. The index has become a symbol throughout the world for the US stock market, he notes.
For most of its early history, the Dow remained in a relatively static trading range - although there were many ups and downs along the way. Generally, however, the index stayed under 300 points. The Dow had a huge upward run in the 1920s, but then tumbled terribly in the infamous 1929 crash. The Dow did not exceed its 1920s high until 1954. But starting in the 1970s, the Dow began ratcheting upwards, breaking through the 1,000 point barrier in 1972; 2,000 in 1987; 3,000 in 1991; 4,000 in early 1995; and 5,000 last Nov. 21.
Some analysts believe the Dow will move through 6,000 points this year. The Dow is currently at the 5,700 point level.
Many people believe the worst stock-market downturn occurred on Oct. 28, 1929, a date often considered the start of the Great Depression. That day the Dow shed 38.33 points, or 12.82 percent. In fact, the "worst" single-day downturn occurred in our own era, on Oct. 19, 1987, when the Dow shed 508 points and the index plummeted 22.61 percent. But the market recovered quickly.
Four Dow indexes
The DJIA is one of four indexes of the US market published by Dow Jones. There is also a utilities index, a transportation index, and a composite index.
On Jan. 5, 1993 the company introduced the Dow Jones World Stock Index, which is a weighted index measuring global market performance in 28 countries. John Prestbo, editor of the Dow Jones World Stock Index, says his company plans to introduce "real-time" (that is, split-second) computerized updating of the world index "sometime this year."