The Economist: End of an era

General Electric (GE) was recently eliminated from the Dow Jones Industrial Average after more than a century as part of the index. GE was one of the 12 original stocks included in the index when it was developed in 1896, and while it had come and gone from the index twice in its early days, the company had been continuously part of the Dow since 1907. It was the last of the original stocks to exit, and it is unlikely to return.
The decision to remove GE was largely based on the fact that the firm’s shares dropped by 57 percent over a two-year period, contrasted with the Dow’s overall 44 percent increase. In addition to the company’s challenges, it was decided that a different firm would better reflect the current drivers of the U.S. economy. Walgreens has now replaced GE.
Before the Dow was formed, it was difficult for investors to get a feel for how the market was performing, thus making stocks far less popular than the more tangibly measured bonds. However, the Dow created an approachable, single-number measure that helped raise interest in stock investments across a larger segment of the population. It had a huge cultural impact.
At the time of its creation, the Dow included companies such as American Cotton Oil; Tennessee Coal, Iron, and Railroad Co.; and others indicative of the industrial base of the times. Over time, the index changed along with the economy, adding firms ranging from financials to aviation to pharmaceuticals. In the late 1990s, early technology companies were incorporated. Recently, modern technology, consumer giants, and globalized banks have joined. The Dow now includes 30 stocks traded on both the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ).
While the Dow is the most widely recognized, there are other indices reflecting various aspects of equities market performance. For example, the Nasdaq Composite Index measures performance of every company traded on this more tech-focused exchange, the Russell 2000 Index reflects performance of businesses that tend to be smaller and domestic, and the S&P 500 tracks companies which tend to be larger and global.
GE ended its 111-year run as part of the Dow on June 26. The elimination of the last of the original 12 stocks in the Index is a symbolic representation of the underlying shifts in the American economy. From a commodities and transportation orientation to a broad and diverse mix of industries, the U.S. business complex has changed dramatically and continues to evolve. The Dow has morphed along with it, thus maintaining its relevance in a dynamic environment. The times, they are a changin’! n

Dr. Ray Perryman is president and CEO of The Perryman Group, an economic research and analysis firm based in Waco.
 

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