The Dow Jones Industrial Average
The one that started it all
In the beginning of Endless Metrics, I mentioned that there were two things that were arguably the most important drivers in the world of economics and finance. The first was Gross Domestic Product (“GDP”), which is more on the economic side of things, and the stock market, which is more on the finance side of things. Now that GDP has been discussed to death, it’s time to move on to the stock market and discuss that!
Unlike GDP, which pretty much has one main source and primary series, the stock market is a broader concept. The stock market could refer to the entire universe of stocks, or a particular set of stocks, or a certain stock exchange, or a set of stocks on a certain stock exchange…you get it.
There is no clear definition that everyone agrees upon because the entire concept is messier. Two people could randomly meet and exchange ownership of their stocks but is that a stock market? Is that part of the overall stock market? How should it be counted versus the very serious traders on the floor of the New York Stock Exchange? And, is the New York Stock Exchange the stock market? Or, is it just a part of the broader stock market?
Because of these crazy scenarios, there is no one single universal indicator for the stock market. Fortunately though, people got tired of arguing and came up with a few proxies that everyone got on board with.
But, it all started with the first one. The original, the most legendary stock market indicator of them all. You have probably heard of it. The one, the only, the Dow Jones Industrial Average ("DJIA”):
What I love about this graph is that it covers a way longer time period than the first few graphs I made with GDP. This thing goes all the way back to 1896! Yes, people were trading stocks back then and thinking about the stock market. One day, a guy named Charles Dow thought “why don’t I average together the price of a bunch of stocks instead of looking at prices of stocks individually?” And so, the DJIA was born.
Look at how it has grown up since then! From a humble index amount of 40.94 to 28,538.44 at the end of 2019. Not including dividends, that’s almost 700 times bigger.
Wouldn’t it be cool if every dollar you had became 700 dollars? That’s what happened here. That’s why everyone cares about the stock market. They want to see their dollars turn into more dollars.
However, just because the early part of the chart is flat does not mean it was smooth sailing. Look at all those shaded areas. All those bad recessions. In the next post, I’ll show the DJIA in another way that will illuminate those periods a little bit better.
Related content:
What’s Next for Endless Metrics
Quarterly Changes in US Real GDP