What is the Dow Jones Industrial Average
The Dow Jones Industrial Average (DJIA) is the most famous and one of the oldest US stock indices. Its quotes are analyzed every day not only by employees of banking and brokerage structures, but also by the largest manufacturers and dealers of the automotive, oil and gas production, chemical and food industries, pharmaceuticals and medicine, airlines and retailers.
Dow Jones Industrial Average Definition
The Dow Jones Industrial Average index has several meanings, specifically:
- It is an objective online indicator of the state of the US economy, represented as the arithmetic average of the stock price of the 30 largest US enterprises. These prices show the growth, fall, or flat of all economies in real time.
- It is a leading indicator for detecting impending global economic crises that occur every 10-11 years. It is clear that at the beginning of the global financial and economic force majeure, the largest corporations begin to withdraw their investments, optimize costs, stop expensive research and the highly costly launch and promotion of new products on the market.
- It is a recognized “standard” for return on investment. 54% of Americans are shareholders thanks to the Dow Jones index futures, by purchasing which the investor receives 5% -9% per year from the growth of the index.
- It is a highly liquid and generally simple tool for independent trading on the NYSE (New York Stock Exchange) or through CFDs with many forex brokers.
The companies that are included in the DJIA are the leaders of the American economy. Their shares are of interest to investors, both in terms of profitability and stable dividend policy. Shares of these companies are called "blue chips” after the most expensive casino nominal value in a casino.
The highest level of current dividends is demonstrated by:
- Boeing Company - $8.22, $2.06 per share as of February 2019;
- IBM - $6.28, $1.57 per share in February;
- 3M Company - $5.76, $1.44 per share in February;
- McDonald’s Corp - $4.64, $1.16 per share in December.
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Dow Jones Industrial Average Index: Dynamics
Starting with the first publication date, when the index was estimated at 40.94 points up to the maximum of 2018 - 26,951.81, the indicator has grown 658 times. This value reflects the increase in the capitalization of American business.
In 1966, the Dow Jones Industrial Average index reached 1,000 points. This level had remained a powerful barrier to the index's upward movement until 1982, when the index overcame the level and began to move up. The historic collapse, dubbed Black Monday, occurred in 1987, when the Dow Jones lost 22.6%.
In previous decades, the most dynamic growth was observed in the 1990s in connection with the “dotcom boom”. In 1995, the Dow exceeded 5,000, and in 1999 overcame the area of 10,000 points. A month later, the index literally soared to 11,014.70. In 2000, the index peaked at 11,722.98 points.
Between 2000 and 2009, the Dow lost nearly half of its capitalization as a result of the financial crisis. The crisis has made adjustments to the index. Paper companies AIG and Citigroup were excluded, they were replaced by Travelers and Cisco.
Since 2008, the market has been bullish. On December 31, 2008, the total market value of all companies included in the index amounted to $6,569,686.80 million.
On August 8, 2011, the index fell by 634 points (to 10,809; 5.55%). The reason was the first-ever downgrade of the US credit rating from AAA to AA. This was preceded by a smaller drop on August 4 by 513 points (4.31%). Another fall (by 520 points; 4.62%) occurred on August 10.
Stock market growth began to slow down in 2015, and 2016 was characterized by strong turbulence, so experts started talking about how a long-term bull market could end.
On August 21, 2015, the Dow Jones index lost 530 points (up to 16,459; 3.12%). The fall was caused by investors' concerns over the crisis in China's stock markets. On August 24, there was an even larger drop: by 588 points (up to 15 thousand 871 points, 3.57%).
On June 24, 2016, the index fell by 610 points (up to 17,401; 3.39%). This is how the market reacted to the Brexit referendum that had been held the day before in the UK.
At the beginning of October 2018, a historical maximum of 26,951.81 was recorded. However, by December, these positions were lost and investors already stated that the beginning of December was the worst in 38 years. Industrial Dow was at the level of 23,592.98. After such pessimistic sentiments, the record on December 27 looked fantastic. The DJIA index rose by more than 1,000 points, showing a historic record.
Between 2008 and 2018, Dow's total market capitalization grew by more than 157%. The value of the index itself increased by more than 200% from 8776.39 in 2008 to 26458.31 in 2018.
In January 2019, the index slipped by more than 500 points because of several factors. Specifically, the 9% drop in Apple shares, a weak forecast for quarterly earnings, and a December fall in the US industrial production index.
The Dow Jones index drops for the following reasons:
- When large investors take profits and wait for the drop, so that then they can reopen buy from a lower level.
- Once a decade, when investors in anticipation of the crisis begin to play big down themselves.
Finance expert and billionaire Warren Buffett predicts that over the next 100 years, the index could reach 1 million points.
The Bottom Line
Now you know what is the Dow Jones industrial average and how the world economy affects it. For more information on financial terms, refer to Monfex.com.