The DJIA Is A Fata Morgana by Wim Grommen
The Complexity Of It All
Here’s an interesting perspective on the oldest stock index in the US.
The Dow Jones Industrial Average (DJIA) is the only stock market index that encompasses the second and third US industrial revolutions. Calculating indexes such as the DJIA and showing this index in a historical graph is a useful way to show which phase the industrial revolution is in. Changes in the basket of shares in the DJIA, changes in the formula, and stock splits during the takeoff and acceleration phases of industrial revolutions are perfect transition indicators. The similarities of these indicators during the last two industrial revolutions are fascinating, but they’re also a reason for concern. In fact, a historical chart of the DJIA (Figure 1) is a classic example of “fictional truth” — that is, a fata morgana, so to speak.
The DJIA was first published in 1896, when it had just 12 constituents and was a simple price average in which the sum total value of the shares of the 12 constituents were simply divided by 12. The shares with the highest prices had the greatest influence on the movements of the index as a whole. In 1916, the Dow 12 became the Dow 20, with four companies being removed from the original 12 and 12 new companies being added. In October 1928, the Dow 20 became the Dow 30, but the calculation of the index was changed to be the sum of the value of the shares of the 30 constituents divided by what is known as the Dow divisor.