DJIA Part Deux
The Editor & Executive Director of the Dow Jones Indexes took issue with my opinions and assertions (& my incorrect index creation date..) in my recent post about the Dow Jones Industrial Average. They’ve asked that I share their point of view…
In reference to your blog on the Dow Jones Industrial Average, we’d like to correct a couple of things and comment on others.
The DJIA was created in 1896, not 1882 (which is when Dow Jones & Co. was formed). Charles Dow created his original index of 11 stocks in 1884, and almost all of them were railroads. General Electric was not among those 11 because it was formed by Thomas Edison in 1890. The DJIA was formed with 12 stocks, of which GE was one. It is in the index today, nearly 112 years later, though it was taken out and put back in twice at the turn of the 20th century.
Changes are not made “fairly often” in the DJIA, unless you think one every two years (the average since World War II) is often. In fact, we make changes as seldom as we possibly can – certainly fewer than most other indexes. We take some pride in the fact that The Dow was the only brand-name market index to trace the entire bear market earlier this decade with exactly the same stocks from beginning to end. By contrast, the S&P 500 had 109 component changes from its peak on March 24, 2000, to the trough on October 9, 2002.
We don’t “concoct” the DJIA’s divisor as you state (concoct having the connotation of being made up). We calculate the divisor, whose job it is to prevent changes in components or stock splits from disrupting the continuity of the DJIA.
Finally, your dismissal of the DJIA (“may not be a great indicator for overall market behavior”) and assertion that the S&P 500 is much better (presumably because it has 470 more stocks) is wide off the mark. Since World War II, the DJIA and S&P 500 have a correlation of 0.95, with 1 being perfectly correlated. What this means is that the DJIA and S&P 500 are telling the same story about the stock market over time. What more do you want?
- Editor & Executive Director, Dow Jones Indexes
Naturally, I asked him for an internship.
