Changes in the Dow Represent Changes in the U.S. Economy

Brian Burton

It became official last week, the last remaining original member of the Dow Jones Industrial Average was booted from the index.  General Electric Co. was one of twelve original members of the DJIA when it was formed in 1896 and had been a member continuously since 1907.  The one-time industrial powerhouse was replaced by Illinois-based drugstore chain, Walgreens Boots Alliance, Inc.

How does a company that only 20 years ago was considered the most valuable on the Fortune 500 lose its place in the blue-chip index it had occupied for more than a century?  According to David Blitzer, chairman of the index committee at S&P Dow Jones Indices, there are multiple reasons.

First, on GE’s stock price decline…”The low price of GE shares means the company has a weight in the index of less than one-half of one percentage point.”  The DJIA is a price-weighted index, so stocks with higher prices have a greater influence on its movement, and stocks like GE with low stock prices basically become irrelevant.  Blitzer added, “Walgreens Boots Alliance’s share price is higher, and it will contribute more meaningfully to the index.”¹

The second and more meaningful reason for the removal of GE is symbolic of the changes that have occurred in the composition of the U.S. economy.  According to Blitzer, “…the U.S. economy has changed:  consumer, finance, health care and technology companies are more prominent today and the relative importance of industrial companies is less.  This change will make the index a better measure of the economy and the stock market.”  Here is a chart of the S&P 500 sector weightings that shows how drastically the relevance of certain industries can change in just over 20 years:

 https://www.bespokepremium.com/sector-snapshot/bespokes-sector-weightings-report-may-2018/

The original Dow components represented only agriculture, railroads and heavy industries, while today’s Dow relies more heavily on non-industrial sectors such as technology, retail and financial services.   Here is a brief glance at some of the more interesting aspects of the Dow’s history and how the index has charted the rise and fall of various industries over time:

Original Components of the DJIA (1896)

  • American Cotton Oil – now part of Unilever
  • American Sugar – evolved into Amstar Holdings
  • American Tobacco – broken up in 1911 by antitrust actions
  • Chicago Gas – now part of Peoples Energy
  • Distilling & Cattle Feeding – evolved into Millennium Chemicals
  • General Electric Co.
  • Laclede Gas – still in operation as Laclede Group
  • National Lead – now known as NL Industries
  • North American – utility broken up in the 1940’s
  • Tennessee Coal, Iron and Railroad Company – bought by U.S. Steel
  • U.S. Leather – dissolved in 1952
  • U.S. Rubber – now part of Michelin

–To determine the index, the prices of the 12 stocks were simply added up and divided by 12, once a day with paper and pencil.

–The Dow closed at 40.94 on May 26, 1896, its first day, but declined by 30% over the next three months to 28.48.

–During the Great Depression, the Dow hit a low of 41.22, nearly flat from its original close 36 years prior.  The index would not reach the 1,000 milestone until 1972, roughly 76 years from its introduction.  Today, the Dow sits just above 24,000, nearly 600 times above the first close.

–Since its beginning in 1896, the components of the DJIA have changed only 60 times.

Here are a few of the more recent notable changes:

  • Feb 19, 2008 – Chevron and Bank of America replaced Altria Group and Honeywell
  • June 8, 2009 – Travelers Companies and Cisco Systems replaced General Motors Corporation and Citigroup
  • September 20, 2013 – Goldman Sachs, Nike and Visa replaced Alcoa, Bank of  America, and Hewlett-Packard
  • March 19, 2015 – Apple replaced AT&T, which had been a member since 1916

Since its founding in 1896, the Dow Jones Industrial Average has been constantly evolving to keep up with changes in the broad economy.  Entire sectors of today’s economy barely existed or did not exist at all when the Dow was first established.  So, what will our gauge for stock market performance look like in another 125 years?  With the onset of artificial intelligence and other great technologies, the change is almost sure to be even more dramatic.

¹https://www.spice-indices.com/idpfiles/spice-assets/resources/public/documents/728153_gedjia62018.pdf?force_download=true

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