The Dow Jones Industrial Average

The Dow Jones Industrial Average (DJIA) operates as a gauge for stock market activity. Investors investigate factors behind Dow Jones point fluctuations in order to implement successful stock trading strategy. Beyond stocks, of course, the Dow serves as a leading indicator for the domestic economy. Be further advised, however, that basing financial decisions off Dow Jones Industrial Average performance may expose investors to distinct risks.

The Dow 30

The 30 component stocks that make up the Dow include ExxonMobil, Nike, and Coca-Cola. On August 29, 2014, the Dow Jones Industrial Average closed out the trading session at 17,098, which was slightly off the then all-time high established at 17,153.80. The Dow Jones Industrial Average is calculated by adding together the share prices for each of the 30 component stocks and dividing that total by a divisor. The divisor accounts for stock splits and spinoffs that have occurred over time within the Dow. The Wall Street Journal editorial board is responsible for calculating the Dow Jones Industrial Average.

Stock Market Performance

The Dow, of course, is likely to advance alongside positive economic news, such as strong earnings and employment reports. Alternatively, the Dow would likely decline amid political instability, deteriorating sales, and elevated energy costs. On a more volatile session, headline news may swing the Dow by at least one percent, in either direction. Most portfolios will track Dow performance closely.

Economic Indicators

The Dow Jones Industrial is a leading economic indicator for the performance of the U.S. economy. Severe Dow declines of 20% or more are associated with bear markets and typically precede recession. In Q4 2008, The Federal Reserve slashed interest rates to zero amid the credit crisis and housing bust that roiled the Dow at the time. Minimal interest rates, of course, lower borrowing costs and encourage savers to take out loans and purchase real estate and stocks. From here, Fed officials will likely drive rates higher upon economic recovery and an appreciating Dow, in order to contain inflation and asset bubbles.

Investment Strategies

Value investors mine the market for undervalued stocks, and hold these investments until they appreciate until fair value. Practitioners of the “Dogs of The Dow” strategy will simply purchase the five component stocks carrying the highest dividend yields. Yields, of course, increase as stock prices fall. Alternatively, growth investors may prefer to load up upon stock amid a rally in the Dow Jones Industrial Average. Short-term traders typically leverage momentum and heavy volume for quick profits.

Financial Risks

The Dow Jones Industrial Average is a price-weighted index, which may lead to distorted information. Share prices are arbitrary, in comparison to overall business value. For example, 3M may trade for a higher nominal share price, but ExxonMobil is a much larger business. The S&P 500 Index, however, is a market-weighted index, where the largest companies carry the most influence over point values. All major stock market benchmarks may be far removed from economic realities amid asset bubbles.