Understanding the Dow Jones Industrial Average: Key Insights on the DJIA

The Dow Jones Industrial Average (DJIA) is a stock market index that tracks 30 major public companies listed on the New York Stock Exchange (NYSE) and Nasdaq. As one of the oldest and widely followed indexes, it's a key indicator of the U.S. economy. Investors and analysts use the Dow to gauge market trends and economic confidence. Changes in the index’s composition reflect shifts in the economy, showcasing the evolution of leading industries and corporations.

Decoding the Dow Jones Industrial Average (DJIA)

The DJIA is the second-oldest U.S. market index after the Dow Jones Transportation Average. The DJIA was designed to serve as a proxy for the health of the broader U.S. economy. Often referred to simply as the Dow, it is one of the most-watched stock market indexes in the world. While the Dow includes a range of companies, all can be described as blue chip companies with consistently stable earnings.

In the early 20th century, the performance of industrial companies was typically tied to the overall growth rate in the economy. That cemented the relationship between the Dow's performance and the overall economy. Even today, for many investors, a strong-performing Dow equals a strong economy, while a weak-performing Dow generally means a slowing economy.

The index changes with the economy. Companies that become less relevant are replaced with those that better reflect current trends. For instance, a company may be removed from the index when its market capitalization drops because of financial distress.

Stocks with higher share prices are given greater weight in the index. So, a higher percentage move in a higher-priced component will have a greater impact on the final calculated value. Initially, Charles Dow used a simple average for the 12 component stocks. However, as mergers and stock splits occurred, this method became ineffective.

How the Dow Divisor Shapes Index Calculation

The Dow divisor was created to address the simple average issue. The divisor is a predetermined constant that is used to determine the effect of a one-point move in any of the about 30 stocks that comprise the Dow. There have been instances when the divisor needed to be changed so that the value of the Dow stayed consistent. As of 2024, the Dow Divisor was 0.15265312230608.

Unlike the S&P 500, the Dow isn't a weighted average and doesn't represent market cap. Instead, it's the sum of all share prices divided by the divisor, meaning a one-point change in any stock moves the index by the same amount.

DJIA Price = SUM (Component Stock Prices) ÷ Dow Divisor

Key Components of the DJIA Index

The DJIA launched in 1896 with just 12 companies, primarily in the industrial sector. They included railroads, cotton, gas, sugar, tobacco, and oil. The index grew to 30 components by 1928. Since then, it's changed many times—the very first came three months after the 30-component index launched. The first large-scale change was in 1932 when eight stocks in the Dow were replaced.

The Dow undergoes regular reevaluation, and non-compliant companies are replaced by those meeting the criteria. Over time, the index became a bellwether of the U.S. economy, reflecting economic changes. For example, U.S. Steel was removed from the index in 1991 and replaced by building material company Martin Marietta.

Recent Changes in DJIA Index Components

As the index is reevaluated, major changes to the DJIA can occur over time:

• In 1997, Westinghouse Electric, Bethlehem Steel, Texaco, and Woolworths were replaced by Travelers' Group, Johnson & Johnson (JNJ), HP Inc. (HPQ), and Walmart Inc. (WMT).
• In 1999, Chevron Corp. (CVX), Sears Roebuck, Union Carbide, and Goodyear Tire & Rubber Co. (GT) were dropped, while Home Depot Inc. (HD), Intel Corporation (INTC), Microsoft Corporation (MSFT), and SBC Communications were added in their place.
• Walgreens Boots Alliance (WBA) replaced General Electric (later split into different companies) in June 2018.
• In August 2020, Salesforce (CRM), Amgen Inc. (AMGN), and Honeywell International (HON) were added to the Dow, replacing ExxonMobil (XOM), Pfizer Inc. (PFE), and defense and aerospace contractor Raytheon Technologies (RTN). Raytheon had joined the DJIA earlier that year after United Technologies (UTX) merged with Raytheon.
• In 2024, several additional changes were made to the index composition. Amazon.com Inc. (AMZN) replaced Walgreens in February 2024 after Walmart's stock split, which reduced its weight on the index. In November 2024, NVIDIA Corp. (NVDA) was added, replacing Intel. This change reflected NVIDIA's remarkable growth in the semiconductor sector, particularly driven by its advances in artificial intelligence technology. Sherwin-Williams (SHW) also joined the index, replacing Dow Inc. (DOW). Sherwin-Williams is well-known for its extensive range of paint and coatings and has shown strong performance in the market, significantly outperforming Dow, which has struggled since its split from DowDuPont.

These latest changes mark just the 53rd adjustment to the DJIA since its inception in 1896 and highlight a shift toward companies that are more relevant in their respective industries.

Major Milestones in DJIA History

The following are some important historical milestones achieved by the Dow: 

• March 15, 1933: The largest one-day percentage gain in the index happened during the 1930s bear market, totaling 15.34%. The Dow gained 8.26 points and closed at 62.10.
• Oct. 19, 1987: The largest one-day percentage drop took place on Black Monday. The index fell 22.61%. There was no evident explanation for the crash, although program trading may have been a contributing factor.
• Sept. 17, 2001: The fourth-largest one-day point drop—and the largest at the time—took place on the first day of trading following the 9/11 attacks in New York City. The Dow dropped 684.81 points or about 7.1%; however, it is important to note that the index had been dropping before Sept. 11, losing more than 1,000 points between Jan. 2 and Sept. 10. The DJIA started to make traction after the attacks and regained all of what it lost, closing above 10,000 for the year.
• May 3, 2013: The Dow surpasses the 15,000 mark for the first time in history. 
• Jan. 25, 2017: The Dow closes above 20,000 points for the first time.
• Jan. 4, 2018: The index closes at 25,075.13—the first close above 25,000 points.
• Jan. 17, 2018: The Dow closes at 26,115.65—the first close above 26,000 points.
• Feb. 5, 2018: The Dow falls a record 1,175.21 points.
• Dec. 26, 2018: The Dow records its largest one-day point gain of 1,086.25.
• July 11, 2019: The Dow breaks 27,000 for the first time in its history.
• Feb. 12, 2020: The Dow hits its pre-pandemic high of 29,551.
• March 2020: The Dow Jones crashes with back-to-back record down days amid the COVID-19 pandemic, breaking below 20,000 and falling 3,000 points in a single day amid several 2,000 and 1,500 up-and-down moves. It officially entered bear market territory on March 11, 2020, ending the longest bull market in history that began in March 2009.
• Nov. 16, 2020: The Dow finally breaks its pre-COVID-19 high, reaching 29,950.44 points.
• Nov. 24, 2020: The Dow breaks the 30,000 level for the first time, closing at 30,045.84.
• July 2021: On July 12, 2021, the Dow trades above 35,000 for the first time. On July 23, 2021, it closes above 35,000 for the first time.
• Nov. 2021: The Dow trades above 36,000 for the first time.
• Jan. 4, 2022: The Dow hits 36,799.65, which was then an all-time high.
• May 16, 2024: The Dow surpasses 40,000 for the first time.
  

Identifying the Limits of the DJIA

Critics say the Dow doesn't fully represent the U.S. economy because it includes only 30 large-cap companies, ignoring smaller ones. They believe the S&P 500, with more companies, offers a better reflection of the economy.

Critics also believe that factoring only the price of a stock in the calculation does not accurately reflect a company, as much as considering a company's market cap would. In this manner, a company with a higher stock price but a smaller market cap would have more weight than a company with a smaller stock price but a larger market cap, which would poorly reflect the true size of a company.

The Dow is also a price-weighted index instead of being weighted by market capitalization. This means that stocks in the index with higher share prices have greater influence, even if they are smaller companies overall in terms of market value. In a price-weighted index, a stock that increases from $110 to $120 will have the same net effect on the index as a stock that increases from $10 to $20, even though the percentage move for the latter is far greater than that of the higher-priced stock. This also means that stock splits can impact the index, while they would not for a market cap-weighted index.

The Bottom Line

The DJIA is a widely followed stock market index, tracking 30 major publicly owned U.S. blue-chip companies. It is also an indicator of the U.S. economy. Because the index is price-weighted, stocks with higher share prices have a greater impact on its movements, which is important for investors to understand when interpreting performance. Its composition has changed to reflect shifts in the economy and the relevance of leading companies, making it an evolving measure of market trends. It has a narrow focus on large-cap firms and lacks representation of smaller companies and certain sectors. The Dow Divisor helps maintain its consistency by adjusting for stock splits and other structural changes.