Deconstructing a Financial Icon

May 25, 2023

It’s iconic…  But generally meaningless these days. 

It was once THE barometer of economic health in the United States.

Today, like an aging patriarch it’s given a certain level of respect — it gets noted in the business news almost every day — but its actual usefulness has diminished substantially.

Still it does provide a nice illustration of what has happened to our country and economy.

I thought I’d share that with you today…

The Granddaddy of Indexes

I’m talking about the Dow Jones Industrial Average.

First a little history, the Dow Jones averages were the brainchildren of journalist Charles Dow — the man who founded the Wall Street Journal. In addition to his reporting, Dow searched for better ways to understand the markets. (His studies eventually turned into a branch of technical analysis known as “Dow Theory.”)

Charles Dow

In 1896, Dow came up with an idea for tracking share prices of 12 of the largest industrial companies — “blue chips” — being traded at the time. It was a simple average that showed the ups and downs of the industrial sector of the market. 

And the Dow Jones Industrial Average was born.

Dow followed up this creation with other averages designed to track other segments of the stock market like the Dow Jones Rail Average (known as the “Transportation” average today) as well as the Dow Jones Utility Average.

The 12 stocks in Dow’s original average represented the economy of the day which was largely industrial. It included:

  • American Cotton Oil
  • American Sugar
  • American Tobacco
  • Chicago Gas
  • Distilling and Cattle Feeding
  • General Electric
  • Laclede Gas
  • National Lead
  • North American (a utility company)
  • Tennessee Coal and Iron
  • US Leather
  • US Rubber

The top of the list sounds like a recipe for diabetes and a heart attack. Some of the other names are comically simple. But one thing that couldn’t be denied is that these were the industrial powerhouses of their day.

The Evolution of “The Dow”

In 1928, 26 years after his death, Dow’s Industrial Average was expanded to 30 companies…

Allied Chemical, American Can, American Smelting, American Sugar, American Tobacco, Atlantic Refining, Bethlehem Steel, Chrysler, General Electric, General Motors Corporation, General Railway Signal, Goodrich, International Harvester, International Nickel, Mack Truck, Nash Motors, North American, Paramount Publix, Postum Incorporated, Radio Corporation, Sears Roebuck & Company, Standard Oil (N.J.), Texas Company, Texas Gulf Sulphur, Union Carbide, U.S. Steel, Victor Talking Machine, Westinghouse Electric, Woolworth, and Wright Aeronautical

If you take a close look at that list, you can see the beginning of the evolution of our economy. Big industry was still dominant, but changes were beginning to make their way into the average. In addition to car manufacturers (GM and Nash) and retailers (Woolworth and Sears), cutting edge “tech” companies like Radio Corp (RCA) were also being included. 

Today, the average has evolved yet again:

3M, American Express, Amgen, Apple, Boeing, Caterpillar, Chevron, Cisco Systems, The Coca-Cola Company, Dow, Goldman Sachs, The Home Depot, Honeywell, IBM, Intel, Johnson & Johnson, JPMorgan Chase, McDonald’s, Merck & Co., Microsoft, NIKE, Procter & Gamble, Salesforce, The Travelers Companies, UnitedHealth Group, Verizon, Visa, Walgreens Boots Alliance, Walmart, and The Walt Disney Company

Outside of Chevron, there are no companies that you might traditionally consider to be “industrial” left in the index. 

There are still manufacturers like 3M and Caterpillar. But the rest of the average is populated by big tech and finance companies. 

So What?

Two things…

The original DJIA — the one that contained the bluest of the blue chips — was designed to serve as a proxy for the health of the broader U.S. economy. It could do that because we were an industrial economy at the time. 

Today the Dow “Industrial” average is hardly an “industrial” average anymore — because we’re simply not an industrial economy any more. (When copper and lithium miners start populating the index again, it will be.)

The second thing extends from that. Picking out the one or two biggest names in various sectors of the economy today in no way represents the entire sector (much less the whole economy). Does Apple or Microsoft represent all of the tech industry?


So while the good old DJIA is iconic, it’s not terribly useful…

Make the trend your friend,

Bob Byrne
Editor, Streetlight Daily