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

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.

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Alex Planes

Alex Planes specializes in the deep analysis of tech, energy, and retail companies, with a particular focus on the ways new or proposed technologies can (and will) shape the future. He is also a dedicated student of financial and business history, often drawing on major events from the past to help readers better understand what's happening today and what might happen tomorrow.

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