What the Heck Is the DOW?

Summary

This video explains the Dow Jones Industrial Average (DOW), a tool created in the late 19th century to measure the U.S. economy's day-to-day performance. Initially made up of 12 industrial companies, the DOW now tracks 30 major corporations, though its relevance is sometimes questioned due to the small number of companies it represents. While it’s often used as a market indicator, it mainly reflects stock market perceptions, not necessarily economic realities. The video encourages understanding the DOW’s role without letting its fluctuations dominate your investment decisions or emotions.

Takeaways

• 📊 The DOW refers to the Dow Jones Industrial Average, created by Charles Dow and Edward Jones in the late 19th century to track the U.S. economy.
• 🏭 Initially, the DOW consisted of 12 major industrial companies, reflecting the U.S. economy's industrial focus at the time.
• 🏢 Today, the DOW includes 30 large companies, including General Electric, the only original company still on the index.
• 📉 The DOW is used as a benchmark to measure the overall stock market and how individual companies perform against it.
• ❓ Some critics question the relevance of the DOW, arguing that it doesn’t fully represent the entire economy, given the 4,000+ companies in the U.S. stock market.
• 🌍 Many of the companies in the DOW do substantial business overseas, so their stock prices don’t always reflect the strength of the U.S. economy.
• 🤔 The stock market is largely driven by investor perception and speculation, rather than the actual state of the economy.
• 🔄 Investors watch the DOW because other investors are watching it, creating a cycle of reaction, sometimes leading to market bubbles or crashes.
• 🧘 Experts suggest not overreacting to DOW changes, with some recommending checking it no more than once a month or quarter.
• 🛑 The DOW is just one of many indicators, like GDP and employment numbers, that provide insight into the U.S. economy.

Q & A

What is the DOW, and why is it important?

The DOW, or Dow Jones Industrial Average, is an index that tracks the stock prices of 30 large U.S. companies. It is used as a benchmark to indicate how the stock market and, to some extent, the U.S. economy are performing.

Who created the DOW, and why was it developed?

The DOW was created in the late 19th century by Charles Dow, a newspaper editor, and Edward Jones, a statistician. They wanted to create a simple tool to reflect the day-to-day performance of the U.S. economy, which was largely industrial at the time.

What were some of the original companies included in the DOW?

The original companies included American Cotton Oil Company, American Sugar Company, American Tobacco Company, Chicago Gas Company, Distilling & Cattle Feeding Company, Laclede Gas Company, National Lead Company, North American Company, Tennessee Coal, Iron and Railroad Company, U.S. Leather Company, United States Rubber Company, and General Electric.

How many companies are currently in the DOW, and how are they selected?

Currently, 30 companies make up the DOW. These companies are chosen because they represent large, well-established industries and are considered to provide insight into the overall market performance.

Why is it questioned whether 30 companies can provide a reliable snapshot of the market?

Some people question the reliability of the DOW because it tracks only 30 companies, whereas there are nearly 4,000 companies being traded in the U.S. stock market. Critics argue that the performance of these companies may not represent the overall economy, especially when most Americans may be struggling.

How can individual investors use the DOW to gauge the market?

Investors can use the DOW as a benchmark. For example, if a stock they own is holding steady while the DOW is declining, they can say their stock is outperforming the market. It helps to see how individual stocks compare to overall market trends.

Why do news outlets focus so much on the DOW despite its limitations?

The DOW is closely watched because it affects market sentiment. Stock prices often fluctuate based on investor perception of the market, so investors follow the DOW because they know others are doing the same. This creates a cycle of watching and reacting to the index.

What did Adam Davidson of The New York Times call the DOW, and why?

Adam Davidson called the DOW an 'anxiety amplification device' because the focus on it can lead to overreactions, causing bubbles and plunges in the market, driven by investor speculation rather than actual economic conditions.

Should the average person worry about tracking the DOW closely?

No, the average person does not need to track the DOW daily. Understanding what the DOW represents and its limitations is important, but it's just one of many economic indicators. Experts suggest looking at it only periodically.

What other indicators should be considered alongside the DOW to understand the U.S. economy?

Other indicators include GDP, employment numbers, and Treasury interest rates. These provide a more comprehensive view of the economy than the DOW alone.