Everybody likes nice, round numbers. So when the best-known barometer of the U.S. stock market burst through the 20,000 mark, it drew big cheers on Wall Street.
The venerable, 120-year-old Dow Jones Industrial Average broke its record less than three months after the presidential election fueled investors’ optimism about the U.S. economy.
But what exactly is the Dow Jones Industrial Average (DJIA)? Does it matter to ordinary Americans? Does it affect people outside the United States?
The Dow tracks the stock prices of 30 big U.S. companies traded on the New York Stock Exchange, including Apple, Coca-Cola, Walt Disney, McDonald’s, Boeing, Microsoft and General Electric.
General Electric is the only one left from the dozen original companies in the index that a founder of the Wall Street Journal thought up in May 1896 as shorthand for whether markets were going up or down.
When investors think a company’s earnings and growth potential are good, they buy more stock, pushing prices up and signifying a strong U.S. economy.
The index goes through ups and downs, rising during “bull” markets when people are buying and dropping when “bears” trigger a selloff — sometimes massive ones — during downturns. Bull markets can last years, but so can the doldrums.
Half of Americans own stocks, according to a Gallup Poll, and millions more own them indirectly through mutual and pension funds. Overseas investors own roughly 20 percent of U.S. stocks.
Originally in double digits, the Dow hit 1,000 in 1972 and 5,000 in 1995. It has tripled since the global financial crisis a decade ago, when stocks lost half their value.
While the Dow has cachet, many experts pay closer attention to rivals that measure far more stocks, including Standard & Poor’s index of 500 companies. Still, the barometers usually move in the same direction.
Alex J. Pollock, a fellow at the R Street Institute, a financial think tank, calculates that after inflation, the Dow index has risen 2.3 percent annually since 1917. “That doesn’t sound like much, but over long periods, that turns into huge advances” that make people wealthier, he said.
So what’s a prudent investor to do?
Whenever there’s euphoria in the market, “reasonable people should ask questions,” says economist Burton Malkiel, who wrote in a 1973 classic, A Random Walk Down Wall Street, that blindfolded monkeys throwing darts could do a better job picking stocks than the experts.
Someday the Dow will hit 25,000, “but that could be 10 years from now,” says Malkiel. “Your guess is as good as mine.”