What Do the Dow's Components Say About the Changing U.S. Economy?

America's most-watched stock index has made a number of changes over the years, and there are some interesting lessons to learn about the economy's past -- and possibly about its future.

May 7, 2014 at 2:15PM

Millions of investors have watched the Dow Jones Industrial Average (DJINDICES:^DJI) over the years, whether they've meant to or not. This landmark index has been a barometer of stock market health since 1896, and its relatively simplistic formulation -- it began with a mere 12 stocks and still only tracks 30 stocks today -- makes it relatively easy for anyone to understand.

Over the decades, the Dow has made nearly 50 changes to its makeup in an effort to maintain a reasonably accurate representation of the American economy. A number of companies have come and gone (and occasionally come back again), leaving a historical record that offers some interesting glimpses into what really matters to the American economy, at least through the prism of this one closely followed index. I've put together a graphical representation of these changes, from 1896 to the present, to help you better understand how the Dow -- and the American economy -- has evolved over time.

Source: Dow Jones Indices and author's calculations. 

There have been a lot of changes, but a number of these additions and replacements occurred either in the Dow's early years or more recently. Half of the Dow's changes took place between its 1896 inception and its Roaring 20s peak in 1929. Along the way, the Dow transformed from a narrow 12-stock index to a slightly more representative index of 30 important American companies, drastically reducing its reliance on commodity manufacturers (dominant trusts that provided Americans with much of their sugar, oil, rubber, leather, and rope were all early Dow components) and metal producers (at one point the Dow tracked both the common and preferred shares of U.S. Steel (NYSE: X) alongside several other steel-focused companies) in favor of a more properly industrial focus.

However, even in its early incarnations, the Dow's overseers were surprisingly forward-thinking about the state of the American economy, as it included consumer-goods companies in the form of tobacco trusts as early as 1896, and first added telecom companies -- AT&T (NYSE: T) has been that sector's primary representative for years, but radio broadcaster and manufacturer RCA was also an early component -- in 1916. Consumer goods companies had nearly as many representatives as metals producers from the 1930s through the 1950s, thanks in part to Procter & Gamble's (NYSE: PG) uninterrupted streak of index membership that began in 1932. In fact, there were more pure-play "consumer goods" companies in the Dow in the 1930s than there are today.

The Dow's more recent history is also an illuminating look into the way America's economy has shifted away from "stuff" and more toward "solutions," which can address problems ranging from the need for a comfortable retirement to the need to live healthier in that retirement. Financial-sector stocks, which first gained a foothold in the Dow with American Express' (NYSE:AXP) inclusion in 1982, now hold six spots on the index, more than any other sector of the economy. Health-care companies gained a spot on the index a mere three years earlier, and there are now more drugmakers on the Dow than there are energy stocks, pure-play manufacturers, or metals companies.

What else has changed?
Commodities stocks, which once represented the lion's share of America's economy, according to the Dow, had a single representative in International Paper (NYSE: IP) from 1979 -- when a meatpacker lost its spot to Merck (NYSE:MRK) -- until 2003, when the sector finally became unimportant enough to drop entirely. Metals, which were represented solely by Alcoa (NYSE: AA) from 1997 onward, were overtaken by an ascendant financial sector in recent years. Both of these sectors once boasted the largest representation on the Dow, but today they're deemed irrelevant to tracking the health of the American economy.

American manufacturing, which was once the whole point of the Dow's existence, is now represented by 3M (NYSE: MMM) and Caterpillar (NYSE: CAT), as other companies that make stuff can be categorized as specialists -- think Boeing (NYSE: BA) and aerospace -- or conglomerates, as General Electric (NYSE:GE) has been for decades. Technology companies, which got their first Dow representative in Eastman Kodak in 1924, were poorly represented until IBM (NYSE:IBM) rejoined the index in 1979, right at the start of the PC revolution. You could argue that Kodak is more of a consumer goods company than a technology company, and in that case, there really wasn't a consistent tech representative at all until 1979. Today there are four tech stocks on the Dow, which gives the sector a larger representation than every other sector except finance.

What stayed the same?
Energy stocks, which were initially represented by utility gas companies, have had a remarkably stable level of representation since 1896. In fact, energy is the only sector that has never lacked representation on the Dow, thanks to one early, nonsensical decision to briefly swap General Electric out for a rubber trust before GE was diverse enough to be called a conglomerate. Since 1924, the Dow has always had at least two retail stocks on its roster as well, in addition to tracking at least three consumer goods manufacturers since 1928.

How will the Dow continue to evolve in the coming years? Will it eventually eliminate the chemical sector -- now represented solely by DuPont (NYSE: DD) -- from its component roster in favor of more tech stocks? Can health care, which is more important to America's economy than it is in any other developed nation, gain greater representation? There are any number of ways in which the economy, and the Dow, might change in the coming years. If you think you know which way America's economic winds might blow -- and which companies could benefit with a spot on the Dow's roster -- let us know by leaving a comment below.

Will this stock be your next multibagger?
Give me five minutes and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks 1 stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more insight into markets, history, and technology.

The Motley Fool recommends 3M, American Express, and Procter & Gamble. The Motley Fool owns shares of General Electric Company and International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers