Dissecting the Dow Jones industrial average

The storied index remains the synonym for "the market" despite falling this year

Once upon a time on Wall Street when market participants said, “The market closed up,” they meant the Dow Jones industrial average had finished higher that day. Even in this Internet age, some Wall Street veterans still mean “the Dow” when they say “the market.” It’s harder to believe these days, with the blue-chip index down 2.89% year-to-date and the technology-heavy Nasdaq up 1.96% for the same period.

But just what is the Dow? It’s a collection of 30 stocks meant to represent key sectors of the economy. It was launched May 26, 1896 by Charles H. Dow, cofounder of The Wall Street Journal. Then, the Dow had 12 stocks and was introduced at a time when equities had dubious reputations. Bonds were preferred by the investors of the day, because they paid interest on a regular basis and were backed by tangible assets like machinery and factory buildings.

The Dow Jones industrial average contains some of the most well-known companies in America, including Coca-Cola (NYSE: KO), International Business Machines (NYSE: IBM) and Walt Disney (NYSE: DIS).

In an effort to more closely mirror the current stock market, four companies were added to the average November 1, 1999: Home Depot (NYSE: HD), Intel (Nasdaq: INTC), Microsoft (Nasdaq: MSFT) and SBC Communications (NYSE: SBC). Dropped from the venerable blue-chip average were Chevron (NYSE: CHV), Goodyear (NYSE: GT), Sears (NYSE: S) and Union Carbide (NYSE: UK).

The reason the Dow is behind other averages like the Nasdaq composite index this year is simple: most of the Dow’s component stocks like Alcoa (NYSE: AA) represent so-called “old economy” companies. These are slower-growth, cyclical businesses in industries like steel and oil whose profits are closely aligned with the economy’s rise and fall.

Despite a strong economy, investors are concerned with the possibility of inflation, which hurts old-line industrial companies. Recently, Federal Reserve Chairman Alan Greenspan told Congress more interest-rate hikes were in the offing, particularly since the four previous increases haven’t slowed down the economy. That’s not welcome news for cyclical shares.

In addition to the industrials, Dow Jones & Co. compiles and maintains other averages like the Dow Jones transports, an index of airline, rail and other transportation shares.

For more information on the Dow Jones industrial average and other Dow indexes, go to http://averages.dowjones.com.

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