The Dow Jones Industrial Average (DJIA or Dow) is one of the most widely watched stock market indices and the second oldest in the world. Created in 1986 by Charles Dow, then editor of the Wall Street Journal, it originally comprised 12 companies from traditional heavy industries, such as Chicago Gas and National Lead, giving it the name ‘Industrial Average’. Today, the index represents 30 companies, with its composition constantly evaluated and periodically revised to include leading blue chip companies across a variety of industries.
What makes the Dow unique is that it is “price-weighted,” measured by the sum of component share prices divided by a divisor that adjusts for a stock split or dividend. In contrast, indices like the S&P/TSX Composite, S&P 500 and NASDAQ are ‘value-weighted’ based on constituent market capitalization (share price times outstanding shares).
Is the Dow a good gauge of the U.S. economy? Over it’s lifetime, it has faced many critics. Some argue it is too narrowly focused, while other suggest its price weighted methodology is flawed because higher-priced stocks tend to have greater influence over lower-priced counterparts.
For example. the same price change for a lower-priced stock will not impact the index as much as that of a higher-priced stock, despite a greater percentage change for the lower-priced stock.
The Dow Today: Does it Matter?
What is particularly notable today is that the Dow’s rise may signal more robust market breadth, suggesting that recent equity market gains are not largely driven by just the technology sector. Consider that the tech sector accounts for 58.8 percent of the NASDAQ and 29.0 percent of the S&P 500, yet only 18.6 percent of the Dow.
