Dow Know-How

The Dow Jones Industrial Average made history when it broke 14,000 briefly on July 17. Two days later, on July 19, it closed above 14,000 for the first time. (1)
This watershed marks a sharp rise in the index over the past several months. It took seven and a half years from when the Dow first broke 11,000 in April 1999 to hit the 12,000 mark in October 2006. However, it took only six months for the Dow to clear 13,000 and a scant 57 trading days (about three months) to hit this latest milestone.(2)
The Dow Jones Industrial Average, often called the DJIA or the Dow for short, is a price-weighted index that tracks 30 blue-chip stocks traded on the New York Stock Exchange and The Nasdaq. The oldest and best known U.S. stock index, the Dow was created by Charles Henry Dow in 1896 and originally tracked only 12 stocks.

The 30 stocks that make up the Dow are generally from among the largest and most stable companies in the United States. General Electric was one of the first 12 stocks chosen for the Dow in 1896 and remains in the index to this day.(3)
Although much has been made about the DJIA breaking 14,000, the number itself is an interesting signifier. "Fourteen thousand what?" you might ask. This number by itself doesn't necessarily mean anything. It is important only as it relates to the history of the index, indicating the market's general trend.

A Little Help from Foreign Friends
The general trend of the Dow's last nine months has been higher. This rise has been in the face of some considerable obstacles. High energy prices and a housing slump driven by the drop of subprime lending have provided the market with some big hurdles. However, in light of these difficulties, there have been a few bright spots that have helped the Dow climb recently. The emergence of a global economy has helped keep inflation in check, thanks to the importing of low-cost goods from countries such as India and China. The recent strength of the global economy has also helped boost the revenue of U.S.-based multinational companies, many of which are listed on the Dow.

What does this DJIA milestone mean for your investment strategy? It's probably good news if you're invested in large-cap stocks in the Dow. But milestones mean little to traders since it's impossible to see a trend in day-to-day action. One day after closing at 14,000, the Dow lost 150 points, closing at 13,851 on July 20. (4)

However, if you're invested for the long term, this news may not mean much. Part of a successful buy-and-hold strategy involves weathering market volatility in favor of positive long-term returns. A savvy investor may take note of a Dow record, but would hesitate before making any hasty decisions as a result.

The performance of an unmanaged index is not indicative of the performance of any particular investment. Individuals cannot invest directly in an index. The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.

1-2, 4) Yahoo! Finance, July 2007
3) Dow Jones & Company, July 2007