The Dow Jones Industrial Average has been a staple tool of investors since before the turn of the 20th Century. It was developed when the Industrial Revolution was just beginning in earnest and has survived past the stock market crashes of both 1908 and 1929, the latter being the leading cause of the Great Depression. The Dow Jones Industrial Average has seen a renaissance throughout the later part of the last 100 years and has morphed into the list of leading indicators that it is today, which in many ways does not resemble a truly “industrial” average of what is happening in the economy. It has taken twists and turns along the way resulting in the current list of leading economic indicators, even though it does still have an indirect connection to industrial stock performance in the United States.
During the early days of the Dow Jones Industrial Average there were relatively few corporations compared to the contemporary structure. The major players were well-known among the investors to the point that many could buy a certain stock and just let it ride built on perceptive corporate strength and resistance to value deflation. That strategy has clearly changed in the contemporary market, with General Electric being a primary example of how a company can lose value in a relatively short amount of time. They are no longer even listed on the DIJA today. Corporations have closed or morphed over the years into different operations through mergers and acquisitions to the current list of prime market indicators.
The Dow Going Forward
The Dow Jones Industrial Average has assuredly shown over time that the tool is an effective method of predicting what will happen in both the short-term and long-term future in certain industries. Mandated conditions on the ground often control long-term effect for specific sectors, such as the Affordable Care Act impact on the medical industry. Contemporary investors make trading decisions in a more fluid manner than those of the past, and short-term profit taking is part of that evolving equation. The DJIA is likewise evolving with respect to the corporate inclusions that give an accurate reflection of macro market predictability. Although many younger investors are directed at the micro stock opportunities for long run positions, the particular market trends associated with the Dow Jones Industrial Average still makes it a solid reference tool for some investment areas.
Weaknesses of the DJIA
The DJIA is assuredly not without its critics. One problem is the fact that it is a price-weighted index that could show a particular investment being more influential than a lower valued stock. Stock price is not always an effective indicator. In addition, the fact that there are only 30 companies represented on the list means that the sample size could be too small to present much in the terms of overall market predictability. There are over 5300 common stocks that trade on a daily basis, and the sample size calculates to less than 1% of the whole market. That is not much of a reflection, even though the listings are major players in the investment market.
It is a sure bet that the Dow Jones Industrial Average is not going anywhere as a predictability tool for all speculators, as the movement of today’s market requires as many measurement tools as possible. The question is effectiveness in overall applications. For the micro investors it may just be a reference, but for the macro long run investors it is still a very important part of contemporary long-term speculation.