THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Sunday, May 26, 1996 TAG: 9605250680
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY TOM SHEAN, STAFF WRITER
LENGTH: 111 lines
When panic-driven selling roiled the stock market on Oct. 19, 1987, the New York Stock Exchange index plunged. So did the Standard & Poor's 500 index and the Nasdaq composite index.
But it was the 508-point drop in the Dow Jones industrial average that made headlines and rocked brokerage firms.
When low interest rates and strong corporate earnings propelled stock prices to record levels in 1995, the NYSE index, the S&P 500 and the Nasdaq index soared.
But it was the Dow's 33 percent gain for the year that became the benchmark for many investors.
The Dow Jones industrial average, which turns 100 today, remains the most widely used measure for anyone asking, ``How's the market doing?''
Dow Jones & Co. will celebrate the Dow's centennial Tuesday with fanfare at the New York Stock Exchange and with a special edition of the company's flagship newspaper, The Wall Street Journal.
The Journal's editors are responsible for monitoring the 30 stocks in the industrial average and for choosing replacements.
Whether they are traders, securities analysts or small investors, anyone interested in stock prices has plenty of alternative measures. These include:
The New York Stock Exchange composite index, which reflects the prices of 2,625 stocks traded at the exchange.
The Nasdaq composite index, which includes the prices of 5,264 stocks traded in the Nasdaq National Market System and over the counter.
The Wilshire 5000 index, the broadest measure of stock prices. The Wilshire takes in more than 7,000 stocks, including those traded at the New York Stock Exchange and through the Nasdaq system.
Yet the Dow industrial average remains the prominent measure. That's partly because of the enormous size of the 30 companies represented in the average.
The Dow, in fact, is a roster of household names: equipment manufacturers like General Motors, Caterpillar and Boeing; oil producers and refiners like Exxon and Texaco; consumer-goods companies like Coca-Cola, Procter & Gamble and Philip Morris.
Because the shares of these companies trade regularly, changes in investor sentiment show up much more quickly in the Dow than in broader indexes like the S&P 500, said Jeremy J. Siegel, a finance professor at the University of Pennsylvania's Wharton School in Philadelphia.
``The stocks of these 30 companies are very active. They respond immediately to economic developments like the Federal Reserve raising or lowering interest rates,'' Siegel said. And that, he said, makes the Dow a more useful indicator of market activity.
When newspaper editor Charles H. Dow published his first stock average of 11 companies in 1884, the stock market was dominated by railroads. Shares of industrial companies were considered speculative. So Dow included the prices of nine railroad stocks and only two industrial stocks.
Over the years, Dow tinkered with his list and gradually expanded it. In 1896, his original average became a rail-stock average, and he assembled a separate list of a dozen manufacturing and utility companies for an industrial average.
All but one of the names on Dow's original industrial average - General Motors - have disappeared from the Dow. Several other companies have survived under different names but were eventually removed.
During Dow's era, calculating changes in the industrial average was simple. At the end of each business day, he added up the prices of the 11 stocks in his average and divided the total by 11.
Because of numerous stock splits over the years, the process of calculating the Dow is more complicated, and The Wall Street Journal applies a formula to provide continuity to the average.
But one weakness remains. Because the Dow is weighted by the prices of its stocks, a change in a higher-priced stock has a greater affect on the average than a price change of the same size in a less expensive stock.
Other market measures, including the S&P 500, more accurately reflect price changes by weighting their stocks by market capitalization. Market capitalization is the price of a common stock multiplied by the number of shares outstanding.
With the rapid growth of the nation's service sector, The Journal's editors have added a handful of non-industrial stocks to the Dow, including American Express Co. and Walt Disney Co. But that hasn't dampened criticism that the Dow's roster of 30 very large companies doesn't fully reflect what's happening in the stock market.
``Someone moderately serious about investing has to look at broader measures, such as the S&P 500,'' said George S. Oldfield, a finance professor at the College of William and Mary in Williamsburg.
The S&P 500, he noted, is the benchmark by which most managers of pension funds, mutual funds and other large pools of assets measure their investment performance.
Don Hays, director of investment strategy at the Richmond-based brokerage firm Wheat First Butcher Singer Inc., still uses the Dow industrial average - along with others measures.
``I know it's not very broad, but it does signal what's happening to the corporate giants of America,'' Hays said.
Although the Dow won't lose its stature, investors will rely more heavily on other measures in coming years, the Wheat First forecaster predicted.
Worried about inflation, many investors reacted defensively during the past 15 years by putting their money into the sorts of large, mature companies reflected in the Dow industrial average, Hays said.
That's going to change. With inflation under control, investors will shift their focus to stocks of younger, growth-oriented companies, Hays predicted. To do that, they will rely more heavily on measures of stock prices that include many more companies, he said. ILLUSTRATION: Photo
CHARLES H. DOW
Graphics
DOW MILESTONES
THE FIRST DOZEN
SOURCE: The Wall Street Journal
[For complete graphic, please see microfilm]
KEYWORDS: CHRONOLOGY HISTORY STOCK MARKET by CNB