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The Dow Makes a Very Bad Decision

Alex Planes
November 1, 2012

On this day in economic and financial history...

Whenever the headlines trumpet Europe's troubles, warn of the impending (for how many years now?) collapse of the European Union, or breathlessly hype the next meeting of Europe's leaders as the precursor to salvation, you'll know that it all began on this day in 1993. The modern, single-currency European Union, with all its many imperfections and inconsistencies, was born on Nov. 1, 1993, when the Maastricht Treaty became effective.

The Maastricht Treaty bound the European Community closer together than ever before, creating a European central bank that would be able to direct monetary policy across the continent. However, the fledgling union faced many challenges on its very first day of existence. European Community president Willy Claes told The Washington Post that Europe had "no reason to celebrate" the new treaty, and he was right. EUwide unemployment, which stood at 8.7% in 1991, had risen to 11.5% when the treaty came into force, and economic growth had contracted in the first half of 1993. Tiny Luxembourg was the only member of the new union that met the Maastricht Treaty's stringent requirements for monetary union.

For all the worries over Europe's future, its unemployment rate has never reached 11% since the adoption of the common currency in 1999. That may change -- EUwide unemployment stands at 10.5% today, and regional GDP growth has been flat or negative for more than a year -- but the region's woeful performance in the early '90s provides a measure of perspective for those doomsayers expecting an implosion at any moment.

Coming to America (to build some cars)
Honda (NYSE: HMC  ) became the first foreign automaker to build cars on American soil on Nov. 1, 1982, when its Marysville, Ohio manufacturing plant welcomed employees onto the assembly line for their first day of work. Since then, Honda has become an increasingly American automaker: In 2011, more of its vehicles were built in the United States than were built in Japan.

Many other foreign automakers have since followed Honda's lead. Today, 10 foreign automakers combine to operate 16 major assembly plants across the U.S. According to a foreign-automaker trade group, some 34% of the 8.7 million vehicles built in the U.S. in 2011 rolled off the assembly lines of these plants.

The Dow's dot-com debacle
On Nov. 1, 1999, the Dow Jones Industrial Average (INDEX: ^DJI  ) made some extremely ill-timed changes to its component makeup. At the height of the dot-com boom, the Dow's management added Intel (Nasdaq: INTC  ) and Microsoft (Nasdaq: MSFT  ) , as well as Home Depot (NYSE: HD  ) and AT&T's (NYSE: T  ) premerger business (while the original AT&T remained part of the Dow) in the form of SBC Communications.

Both Intel and Microsoft were nearing all-time highs when they joined the Dow. Intel reached its highest-ever market cap of $502 billion less than a year later, and Microsoft reached its peak before the end of 1999, topping out at an astounding $613 billion market cap on Dec. 27. Since Nov. 1, 1999, shareholders in both companies have seen the value of their holdings decline by at least 20% over the course of more than a decade, even when accounting