This Week in History

On May 26th, 1896, Charles Henry Dow, publishes the first Dow Jones Industrial Average.

  Editor of the nascent Wall Street Journal, he added twelve prices of leading companies together and divided by twelve to arrive at 62.76. The components of the index changed fifty-two times in coming years. In 1916, it expanded to include 20 stocks; in 1928, it grew again to 30 stocks, a composition that remains. The 1929 stock market crash led to the Great Depression, with the DJIA losing nearly 90% of its value from its high in 1929 to its low in 1932. During the mid-20th century, the DJIA reflected the post-WWII economic boom and industrial expansion in the United States, surpassing 500 points for the first time in 1956 and briefly hitting 1,000 points in 1966 before falling back. The DJIA continued weighting its components by their price per share, and the title “Industrial” remains despite a few modern components being involved in heavy industry. Little could Charles Henry Dow have imagined how his arbitrary index, now available with constant updates instead of once per day, would affect generations of future investors.

     Last week, during intraday trading, the DOW approached and briefly bypassed a milestone at the 40,000 level. Approaching a milestone of my own this summer (I turn 50 in June), I’m wary of giving arbitrary numbers too much attention. And a deeper dive into the DOW backs up the theory. First, given the history of the DOW, the composition has obviously changed dramatically throughout the decades. So, are you really comparing apples to apples? Or, in this case, Apple (AAPL) to Apple (AAPL)? And the price weighting leads to some oddities in calculating the index. For instance, can anyone name the largest component in the DOW right now? Apple? Microsoft? Goldman Sachs? All good guesses but incorrect. Right now, United Healthcare is the largest component in the DOW at just over 8.6%. The fact that a healthcare company is the largest component after a huge run-up in technology shares over the last year should tell you that for better or for worse, the old DOW is much less sensitive to change than its counterpart, the S&P 500. Indeed, those tech companies we listed with ties to the booming AI industry are 8th (MSFT) and 19th (AAPL) in weightings inside the index. The Dow's recent run past 40 (thousand) is no more significant than my own survival of the decade of my 40s. Longevity is preferable to the alternative. But let’s not make more of the story than it deserves.