Dow At 40,000: Here's How It Got There

(MENAFN- ValueWalk) The Dow Jones Industrial Average made history this past Thursday, reaching the 40,000-point mark for the first time ever. It broke over 40,000 at about 10:30 a.m. Eastern but closed on Thursday just below that mark at 39,869.

On Friday, the Dow managed to close just above 40,000, and it remained above that key level in early trading on Monday. Of course, whether or not the index can hold that 40,000 level in the coming days remains to be seen.

Nonetheless, 40,000 is a significant milestone for the Dow Jones Industrial Average, which has been the most-cited barometer for the market for more than 100 years. Here's how it reached that level and why it matters.

Why the Dow matters

The Dow Jones Industrial Average may not be the index that most represents the market's movements; that would probably be the S&P 500 or the Russell 1000.

The Dow only has 30 stocks in it, selected by a committee based on a variety of criteria. The stocks in the Dow are reviewed periodically to make sure that all of them effectively meet the criteria, and if some don't, they are replaced. The last change came earlier this year, when Amazon (NASDAQ:AMZN) was added and Walgreens Boots Alliance (NASDAQ:WBA) got the boot.

The companies in the Dow are not necessarily the biggest, although three of the largest U.S. companies are in it: Amazon, Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT). However, what the committee tries to do is select the largest, most influential stocks from across the various sectors and industry.

As a result, the index contains stocks like Amgen (NASDAQ:AMGN) representing healthcare; Travelers (NYSE:TRV) representing insurance; Walmart (NYSE:WMT) representing retail; and McDonald's (NYSE:MCD) representing food, to name a few. In this sense, the Dow Jones Industrial Average is often considered to be more illustrative of the state of the economy than the broader stock market.

The Dow is also the oldest index, having been around since 1896 . It is also among the most-cited stock indexes by the news media and the public at-large, perhaps because it is the oldest and most well-known.

The Dow's returns largely track with those of the S&P 500 over time. If you go back to 1990 and take a 34-year snapshot , the Dow has an average annualized return of 8.1%, and the S&P 500 has an average annualized return of 8.3%.

However, the Dow's year-to-year returns are less volatile than those of the S&P 500. Take recent history as an example: the Dow returned just 13% in 2023, when the S&P 500 was up 24%. On the other hand, the Dow was off just 8% in 2022, when the S&P 500 fell 19%.

These patterns track throughout both indexes' histories, in part because the Dow contains mostly large, blue-chip, stable value stocks that are less volatile. The Dow is also weighted by price rather than market capitalization like the S&P 500, so the giant stocks don't dominate performance as much.

The Dow Jones Industrial Average through the years

As mentioned, the Dow launched in 1896, and it didn't hit 1,000 until Nov. 14, 1972 . Part of the reason it took so long to reach this key level is just math; it takes bigger gains when the numbers are lower than when they are higher. A 20% gain when the Dow is at 100 is just 20 points, whereas a 20% gain when the Dow is at 5,000 is 1000 points, so the gains come quicker as the index grows.

It took far less time to reach 2,000: just 15 years, as it hit that mark on Jan. 8, 1987. Things start moving faster after that, as the Dow hit 10,000 just 12 years later on March 29, 1999. This was amidst the tech and dotcom boom.

The next 10,000 took a while as there were setbacks caused by the dotcom bust in 2000-2001 and the Global Financial Crisis in 2008-2009. Some eight years after the Dow hit 10,000, it reached 20,000 on Jan. 25, 2017.

Over the next seven years, the index would double in size to 40,000. It reached 30,000 rather quickly, hitting it on Nov. 24, 2020, and it reached 40,000 just as rapidly, piercing that plateau on May 16, 2024.

Looking forward, history suggests the Dow Jones Industrial Average should hit 50,000 sometime around 2027, if not sooner.



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