In practice, however, the utility average rarely
leads the overall market in an upward move-
ment; rather, it tends to rise at about the same
time as the industrial and transportation aver-
ages. This concurrent behavior can be a value
indicator in its own right if the utilities are not
rising with other stocks, a period of market
weakness could develop.
The utility average does sometimes lead the
overall market lower On several important
occasions it has declined in advance of the over-
all market as represented by the industrial
average. In 1987, for example the Dow Tones
Utility Average began declining in January,
while the Dow Jones Industrial Averages kept
rising through August then drifted lower until
the entire market crashed on October 19.
Unlike the industrial average which has under-
gone more than 100 changes of component
stocks the utility average has remained rela-
tively unaltered. The utility average started
with 18 stocks and six months later on July i,
1929, the number was increased to 20. The aver-
age was reduced to 15 stocks on June 2, 1938,
and has remained at that level ever since
For trivia buffs The original utility average
included American Telephone & Telegraph Co,
which was removed in 1938 and added to the
Dow Jones Industrial Average in March 1939,
supplanting International Business Machines
Corp. International Business Machines Corp.
was reinstated in the Dow Jones Industrial
Average in 1979.
Currently the utility industry is in the midst of
rapid change Utility deregulation is sweeping
the country Legislation is taking shape in
California, Texas Pennsylvania, Massachusetts
and Illinois. Congress also is considering laws
that could force increased competition and, with
it, lower electricity rates for both homeowners
and businesses This trend is spawning a profu-
sion of takeover deals among retail and whole-
sale and regional and national power providers
The stocks currently in the utility average are:
American Electric Power
Columbia Gas System
Consolidated Edison Co. of New York
Consolidated Natural Gas
Duke Power
Edison International
Enron
Houston Industries
Peco
PG&B
Public Service Enterprise Group
Southern
Texas Utilities
Unicom
Williams
How the averages are calculated
Originally Charles H. Dow simply added up the
prices of the stocks in his average and divided
by the number of stocks. But since 1928 the divi-
sor has been changed to preserve historical con-
tinuity. Today each average is the sum of the
home exchange's prices of the stocks listed on it
divided by the current divisor
The most frequent reason for adjusting the divi-
sor is a stock split Suppose a company in the
Dow Jones Industrial Average issues one new
share for each share outstanding. After this two-
for-one split each share of stock is worth half
what it was immediately before, other things
being equal But without an adjustment in the
divisor this split would produce a distortion in
the industrial average.
Here is an example: Assume three stocks are sell-
ing at $5, $10 and $15. Their average price is $10
Now assume the $15 stock is split three-for-one,
and the stock subsequently sells for $5. Nothing
has happened to the value of an investment in
these shares but the average of their prices now
is $6.67, not $10. An adjustment must be made so
that the "average" will remain at $10.
This can be done in various ways mathematical-
iy, but at Dow Jones it is handled by changing
the divisor or the number that is divided into
the total of the stock prices. In this example, the
new divisor would be 2 instead of 3.
Most changes in the divisor me downward. The
divisor of the industrial average fell below 1 in
1984 with a two-for-one split by Merck & Co.
When you divide by a number less than 1 the
effect is to multiply Thus, with the divisor of
0.26908277 in effect on Sept 15, 1997, a net increase
of $10 in the aggregate prices of the 30 stocks
would cause the industrial average to rise 37.16.
The divisor for the transportation average also is
below 1 but the divisor of the utility average is
above 1.
How stocks are picked for the averages
The editors of The Wall Street Journal select the
components of an three average In choosing a
new company they look among substantial
companies with a history of successful growth
and wide interest among investors
Of course the company must be in the trans-
portation or utility business to be considered for
the transportation and utility averages As for
the industrial average the editors take a broad
view of what "industrial" means Obviously the
industrial average isn't for smokestack compa-
nies only Service companies qualify for adm~-
sion, too.
The stocks in any of the averages an not changed
often. The Journal editors believe that stability of
composition enhances the trust that many people
have in the averages The most common reason
for changing a stock is that something is happen-
ing to one of the components, such as a company's
being acquired. Whenever one stock is changed,
the rest are reviewed.
How high can The Dow Jones Averages climb?
As high as they want to. There aren't any math-
ematical limitations on the ascent of any of the
averages. But no matter how large the numbers,
it is the market's trend at any given time that is
important Much attention has been paid over
the past decade when the Dow Tones industrial
Average, in particular, rose through millennial
milestones such as 6000, 7000 and 8000. These
numbers in themselves don't mean anything
except as they relate to what has gone before if
the industrial average is at 8000 and the month
before it was at 7700, then the market's basic
trend is upward. If you look into your crystal
ball and see the industrial average at 9000, it
may look like good news from here and now but
may actually be bad news if the preceding mile-
stone was 10000. In short, the purpose and value
of the industrial average are to indicate the mar-
ket's general trend. The numbers are just marks
on the measuring stick.
Do The Dow Jones Averages foretell the U.S. economy?
Not reliably. To be sure, there is a great deal of
common ground between the economy and the
market Stock investors try to anticipate future
profits and corporate profits are a prime fuel for
the U.S. economic engine So, not surprisingly
the market frequently rises ahead of economic
expansion and falls prior to economic slowdown
or contraction Trouble is, this relationship isn't
finely correlated; there are other factors that
move markets and still others that affect the
economy Moreover, many people make the mis-
take of calibrating their economic expectations
to the market's movements. The result, as Nobel-
laureate economist Paul A. Samuelson put it:
"The market has predicted nine of the last five
recessions"
However the averages do constitute a biogra-
phy of American business chronicling the shift
from a nation of farmers and fledgling industri-
alists to an economy dominated by service and
technology companies
Many of the original 12 stocks in the industrial
average paint the picture of an agrarian economy
The companies grew cotton, sugar and tobacco
and provided cattle feed. Rope and leather fig-
ured prominently in the industrial average in its
early days At various times between 1896 and
1915, the average included U.S. Leather U.S.
Cordage, Standard Rope 8 Twine and Central
Leather
Changing modes of transportation can be traced
in both the industrial and the transportation
averages Pacific Mail Steamship was an early
component American Locomotive and Baldwin
Locomotive Works both joined in 1916 and went
out during the 1920s The railroad average gave
way to the Dow Jones Transportation Average in
1970, with the addition of trucking companies
and airlines.
General Electric Co. is the only stock included
in the original industrial average that still is a
component today But GE itself has changed
drastically from a company concerned primarily
with developing applications of electric power
into a giant conglomerate with interests in
broadcasting, finance and consumer goods as
well as industrial and power equipment if it
had remained the company it originally was, GE
probably would have been dropped long ago.
Since the 1950a changes in the industrial aver-
age have reflected the rising importance of the
technology entertainment and service indus-
tries. For example, international Business
Machines was added in 1979, American Express
in 1982 and Mcdonald's in 1985. J.P. Morgan and
Walt Disney joined in 1991.
Keeping up with The Dow Jones
Averages
News about The Dow Jones Averages is carried
in The Wall Street Journal Barrons and other pub-
lications and services of Dow Jones h Company
One of the best ways to learn more about the
averages is to visit the World Wide Web site on
the Internet that is devoted exclusively to them.
The site is free
Among other things, the site provides historical
context for the averages in charts articles and
data One of the unique features of the site is to
give browsers an opportunity to query the data
base not only to see The Dow Jones Averages'
performance on any trading day in the past cen-
tury but also to see what stocks made up the
average on that day
There is a wealth of information on the site, and
more is being added regularly Visit often!
To see the Charts for:
The Down Jones Industrial Average 1987-1997
The dow Jones Transportation Average 1987-1997
The Dow Jones Utility Average 1987-1997 Dow Jones Charts.Return to Angelfire Home Page