What is the reason for the fall in the Dow Jones index. The Dow Jones Index: What It Is And How It Works. What is the Dow Jones Industrial Average

The question of what the Dow Jones index is, what it means, has been asked at least once by each of us, looking at the news. More and more often from the TV screen we hear about the fall of the index or the rise of its rate. And against the backdrop of the economic crisis, I would like to understand in more detail financial terms in order to always be informed.

Charles Doe and Edward Jones

It was by the names of these two people that Charles Doe, invented by them, was named and grew up in a very poor family, from the age of 6 being on the brink of survival, without attending school! By the time he came of age, he was able to achieve that he worked as a correspondent for a famous newspaper. Feeling an interest in business and realizing that he could achieve more, he moved to New York, where he met his future partners Edward Jones and Charles Bergstresser.

A year later, they founded the newspaper known all over the world today - the Wall Street Journal. In this newspaper, for the first time, they began to publish stock exchange reports. Financial condition America's companies became transparent. Thanks to this, the business began to develop more actively.

How did the Dow Jones come about?

In 1884, the partners decided to derive an activity index to make the analysis easier. It was supposed to reflect business activity in the New York financial market. For this they chose twelve largest companies, added the value of their shares and divided by 12, thereby calculating the arithmetic average value of the securities of these companies. The increase in value indicated the growth of the company and, accordingly, the economy, the fall in the Dow Jones showed a decrease in capital and a downturn in the economy.

Since 1896, the Dow Jones Index has been published in world publishers. So the Dow Jones Industrial Average became the first index used on the stock exchange.

How to calculate the index?

To understand what the Dow Jones Index means and really understand the numbers that reflect the index, you need to understand how it is calculated.

To take into account all historical data that can affect the level of the index, a special divisor was invented (before that, the sum of the value of companies' shares was divided by their number). The value of this divisor is constantly changing.

For example, if we take that the sum of the value of all shares of 30 companies is 2641.03, and the divisor is 0.1557159051116, then it is easy to calculate the index value by dividing 2641.03 by 0.1557159051116 = 16960.57. In fact, the Dow Jones is not that complex.

If the share price of at least one company changes, the index will also change. Changing it into positive side speaks of an increase in stock prices. But this is conditional, since the increase in the value of shares of large companies is more noticeable and may overshadow a slight decline among small ones. And if you own any stock in a Dow Jones company, a rise in its level does not mean profit for you.

If, for example, the value of the index fell by 100 points, then this means that the share price of 30 companies fell by about $ 100.

Which firms are included in the index, world indices

In 1896, the index was calculated from the sum of the stock values ​​of a dozen of the largest companies in the United States. Later, the number of companies was expanded to 16, and today there are thirty. Companies that lost their rating on the global stock market were pushed out by larger ones modern companies... Until today, only one company, originally listed in it, has survived in the index - General Electric. Also included in the index are Microsoft, Coca-Cola, McDonald's, American Express, Boeing, Johnson & Johnson, Nike, Procter & Gambal, Visa, Walt Disney " other.

Also, the NASDAQ index is often heard, it reflects transactions for the purchase and sale of securities that are carried out on the market outside the exchange.

Each country has its own indices, which include the largest companies. Calculations are made in almost the same way as in 1884, the average cost of capital is calculated, but according to a more complex scheme.

NIKKEI - Tokyo index, DAX - Germany index, MICEX index in Russia.

It should be noted that logistics companies involved in transportation are not included in the Dow Jones index, as are water and energy companies.

The relationship of the index to the economy

By complicating the formula for calculating the modern Dow Jones index, financiers made it possible to bring the index indicators closer to those of the United States economy. This means that the state of the index really reflects the state of affairs in America at the economic level.

The companies in the index have networks all over the world, so we can say that the Dow Jones also reflects the state of the global economy. If there is an increase in the index, then it is possible to predict the growth of profits of the companies included in it, because focusing on its indicators, investors make decisions about injecting money into these companies.

Index advantages and disadvantages

Certainly, the main advantage of the Dow Jones index is its well-deserved authority. It is the oldest index in the world and has successfully passed the test of time. The more people will be guided by it, the more reliable its performance will become. And stability is the key to success and income.

The main disadvantage of the Dow Jones index is that it includes only 30 companies. In the 19th century, this was more than enough, and today these companies cannot reflect the entire American economy, because companies that can influence financial market and the state of stock quotes, about ten thousand. In this regard, more and more analysts prefer to focus on indices that include more companies, for example, the S&P 500 (the number of companies is reflected in the name). Or consider the indicators of the indices in a comprehensive manner.

Also, the index does not take into account the size of companies, often the increase in the price of shares of a large company hides the decline in prices for smaller ones.

The rise and fall of the Dow Jones

The consequences of world economic crises are sharply reflected in the index. Having built a graph of the index in dynamics, one can clearly note the downturns in the economy and view its growth rates. The capitalization of America was at a rapid pace, especially this was reflected in the index in the 80s and 90s.

The huge drop in the index was due to the global financial crisis in 2008. In 2007, the level of the index was 14,000, and a year later - 7,000. By 2010, it rose to previous levels and continued to grow further.

The biggest loss in one day was remembered by financiers and analysts around the world as “Black Monday”. The collapse of the Dow Jones index in the world market that day was 22.6%.

The index level is affected not only by economic forces for example, after the explosion of the Twin Towers in 2001, the index fell by 7.1%.

Consequences of a fall in the index

Every investor who is not even interested in stock market reports and has nothing to do with America and its stock market knows what threatens the Dow Jones index collapse. All investment assets are indirectly dependent on the level of the Dow Jones index. This is primarily due to its influence on the American currency rate. And the dollar rate affects everything!

In Russia, prices for raw materials will begin to fall, which will negatively affect the exchange rate of the country's main currency. Then there is a chain reaction: the inflation rate rises, the amount of investment decreases, the price of loans rises, the period of stagnation is delayed.

And if you heard that the market rose or fell, then know that we are talking about the Dow Jones index.

The collapse at the beginning of 2016

Early January 2016 financial world shuddered. In four days, the Dow Jones has lost more than in the past 119 years. And on the first day of trading on January 4, the decline was comparable to that of 1932 and 2001.

The largest drop in one day (6.9%) was in 1932 during the Great Depression in America. In 2001, the index was down 2.8%, seemingly not much, but actually noticeable for investors.

The first four days of 2016 kept investors in a state of panic. And all this happened because of the reports on the state of the American economy. Throughout 2015, there was a decline in industrial production in the United States.

The indirect reason for the fall was the state of uncertainty on the stock exchange in China. The index of the Chinese stock exchange fluctuated quite noticeably, then falling by 11%, then rising by 2%. After the shares fell by 7%, trading was terminated and the stock exchange closed.

Devaluation of the Chinese monetary currency and the transition to a new form of economy can lead the whole world to the next economic crisis.

MOSCOW, 6 Feb - RIA Novosti. The main US stock indexes fell by 3.8 - 4.6 percent on Monday amid concerns about the growth of US bond yields, the Dow Jones and S&P 500 thus canceled all growth for 2018.

According to preliminary data from the stock exchanges, the Dow Jones lost 4.6 percent, falling to 24,345.75 points, the S&P 500 - 4.1 percent, falling to 2648.96 points, the Nasdaq - 3.78 percent, to 6967.53 points.

The Dow Jones fell below 25,000 points, falling during trading by more than 1,500 points, and by the end of the day - by 1175 points, which is the highest in the history of the index. In percentage terms, this is the maximum drop since August 2011.

The economy is strong

The White House did not see danger in the fall of stock indexes, again calling American economy strong.

President Donald Trump "is focused on sustaining fundamental economic indicators that remain exceptionally strong, "the White House said in a statement.

The US administration believes that the decline in stock indexes is a common market fluctuation, White House spokesman Raj Shah told reporters. "Markets fluctuate, but fundamentals our economies are very strong, and they (the markets - ed.) are going in the right direction, "Shah said.

We are not talking about a "bursting bubble"

The collapse of the leading US industrial index Dow Jones on Monday to a historic low, most likely speaks of a correction in the market, and not of a "bursting bubble", Scott McDonald, chief economist at Smith's Research & Gradings and senior associate expert of the American CSIS institute, Scott McDonald, told RIA Novosti.

“Two things are happening (in the market now). There has been too long a rise in the stock market. Too much positive, many have invested in stocks. And, of course, this could not last forever. On the other hand, the economy is growing, breaking through the forecasts of experts. And here on Friday we state the departure of the head of the Fed Jannette Yellen, who was very careful, and a new guy (Jerome Powell) comes, in which there will be, perhaps, not three, but four rate hikes, "the source told RIA Novosti.

The danger of an overheated market

Janet Yellen, who last Friday worked her last day as head of the Federal Reserve System, warned of the danger of an overheated market before leaving, although the current situation, in her opinion, has not yet approached this line.

“I don’t want to call what we are seeing now as a bubble, but I would say that in general, the valuation of assets has been increased,” Yellen said in an interview with PBS. According to her, investors need to "diversify their investments."

Projected shocks in the global economy

Saxo Bank is getting younger in its annual survey "Shocking Predictions", according to which a wave of shocks awaits the global economy in 2018, including the weakening of independence and control of the American and Japanese central banks, the collapse of the S&P 500 stock index, political tensions in the European Union and the loss of investor interest in bitcoin.

One of the main events next year, according to the forecast of Saxo Bank, will be the weakening of the independence of the US Federal Reserve.

"Historically, the degree of independence of the US Federal Reserve was determined by the needs and policies of the federal government. In 2018, it is expected to weaken significantly, as Washington plans to limit government revenues in the face of the threat of a collapse of the debt market," the document says.

Major US stock indexes fell on Monday.

The Dow Jones Index, the main and oldest index of stock market activity, is named after two people: Charles Henry Dow (1851-1902) and Edward Davis Jones (1856-1920). It was created to track the development of the industrial component of the American stock markets.

Thus, the Dow Jones industrial index lost 4.6 percent and dropped to 24345.75 points, the S&P 500 went down by 4.1 percent, dropping to 2648.96 points, the Nasdaq - 3.78 percent to 6967.53 points.

All this happened against the background of market fears about the growth of US bond yields.

In Japan Nikkei index also went down. So, in Tokyo stock exchange it decreased by 4.8 percent to the level of 21.594 thousand points.

The Dow Jones index collapsed - what does it mean?

Against the background of a sharp drop in securities prices in the US stock market, the 500 richest people in the world have lost $ 114 billion. Such data leads Bloomberg.

Founder and CEO suffered the most investment company Berkshire Hathaway Warren Buffett. His fortune fell by $ 5.1 billion (see).

In addition, 17 billionaires lost more than 1 billion per day, including. His fortune decreased by $ 3.6 billion. Richest man in the world, Amazon founder Jeff Bezos lost $ 3.3 billion (see)

Why did companies and billionaires lose money due to the fall in the Dow Jones?

The Dow Jones Index covers the 30 largest US companies. The definition of "industrial" is nothing more than a tribute to history: now many of these companies do not belong to this industry. Previously, the index was calculated as the arithmetic average of the stock prices of the companies covered. Currently, a scalable average is used for the calculation: the sum of prices is divided by a divisor, which changes whenever the stocks included in the index are split (split) or merged (consolidated). This allows maintaining the comparability of the index, taking into account changes in the internal structure of the shares included in it.

Reasons for the fall Dow Jones

Scott McDonald, chief economist at Smith's Research & Gradings, believes that the collapse of the major US stock indexes is due to the market correction, and not to the “bursting bubble” of the American economy.

The leading US industrial index Dow Jones fell on February 5 by 1.175 thousand points (4.6%) following the results of trading on the New York Stock Exchange. In addition, the American S&P 500 index collapsed as well. It lost 113.19 points (4.1%). Thus, the Dow Jones and S&P 500 canceled all 2018 gains.

Whether we like it or not, we live in an interconnected world in which it is impossible to isolate ourselves from the problems of other participants in the world economic activity... Experts have a serious suspicion that we are witnessing a second wave of the super-crisis that began in 2008, and now it will be bad for everyone from Beijing to Washington for a while. As they say in the USA, "the low tide puts all boats on their belly."

Let's hear the handshake of Bank of America, which is now drawing very sad conclusions from the theoretical legacy of Charles Doe.

Over the past week, the Dow Jones index lost 5.8%, and capitalization American market decreased by a trillion dollars overall:

It's funny that Reuters, the Financial Times and other Western media alike blame China for this situation. According to them, investors worried about the slowdown in the growth of the Chinese economy are massively dumping American shares, because without the growth of the Chinese economy, all hopes for the growth of American companies turn out to be, to put it mildly, unjustified.

To understand the reasons for the general nervousness, just look at the infographic, courtesy of the American business channel CNBC:

In August, the Dow Jones index decreased by 1230 points. Such falls in recent history were recorded only during the crisis of 2008, in September 2002, in September 2001 and in August 1998. By the way, few people know, but it was the Asian-Russian crisis of August 1998 that dealt the first serious blow to the American financial system... Then the Fed had to save the savings of a certain part of the American elite, who played into Russian GKOs through the LTCM (Long Term Capital Management) fund. Those financiers, of course, played not only in GKOs, but, most likely, it was the Russian default that served as the last straw that finished off the beloved fund of some American elites.

It is easy to assume that it is precisely some similarity of current events with what was observed on the market during other crisis moments that saddens American investors and journalists. Also, the statement of the Bank of America analyst, who came to the conclusion that “according to the Dow theory, there was a signal to sell”, clearly does not add optimism to the market.

This is very important point, let's dwell on it in more detail.

The Dow Theory is a compilation of several principles drawn from the publications of the famous Charles Dow, founder of the Wall Street Journal and the daddy of the Dow Jones Index, which you've probably heard of. If you greatly simplify the details and try to find economic essence in his reflections, the following will be highlighted:

1. If all is well in the economy, then transport activity should increase.
2. An increase in transport activity will lead to an increase in the profits of American transport companies and the rise in the prices of their shares.

To assess the situation in transport industry a special index of stocks of transport companies is used - Dow Jones Transportation Average - the Dow Jones transport index. To assess the situation in the industry, the Dow Jones Industrial Average is used - the Dow Jones industrial index.

When the media writes about the Dow Jones index, the industrial index is usually implied. According to The Dow Theory, which was finally formulated after his death, if the movement in the price of transport shares is confirmed by the movement in the price of industrial shares, then we can safely expect a long-term growth in the market as a whole.

On a practical level, this means the formula: if the Dow Jones transport index renews new highs and the Dow Jones industrial index renews new highs, then you need to buy.

However, now everything is happening exactly the opposite. As an analyst at Bank of America shows, both indices are falling to new lows, which means that now is the time to apply a different formula - if the Dow Jones transport index falls and the Dow Jones industrial index falls, then it is necessary to sell.

The Dow Theory is not a surefire way to assess prospects stock market but investors themselves attach enough importance to it that articles about "Dow Theory recommends selling" appear in top American business media such as the Wall Street Journal and Marketwatch:

It is difficult to disagree with the general assessment of the situation from Bank of America:

In the short term, markets appear to be trying to force the Fed not to raise rates in September or force the Chinese to launch a more serious stimulus program to bolster growth expectations.

Roughly speaking, financial sector of our planet is ready to arrange a fierce hysteria only at the hint that they will disconnect him from the printer of dollars or make access to the printer paid. The media are already getting involved in hysteria. Suzy Orman, a well-known TV host who proudly bears the title of "The Most Trusted American Personal Finance Expert", already tweets that the Fed needs to "hear the screams," "help," and urgently "promise not to raise rates." If the markets continue to fall, the hysteria will become much more intense, and not so much journalists as bankers and financiers will be hysterical, and they have enough leverage of political influence.

Whether the collective hysterics of the financial sector will break the plans of the Federal Reserve, we will find out on September 16-17. If the financial lobby wins, it will be interesting to see if the Americans will be able to put out the flaring fire with wads of money this time too.

PS... Dear colleagues, as you already know, this week my blog was

"The Dow Jones Index today ..." - the housewife hears from the TV and switches the channel. “That's it, the financial news has begun,” she thinks. - nothing more interesting. " Give me 10 minutes and I'll explain to you why the housewife is wrong.

Index is a scary word until you figure out what it means. In our case, an adequate synonym is “indicator”. Dow Jones score, is that better? Fine. It remains to figure out what the oldest existing index shows us.

Dow Jones is a stock index, a kind of "virtual portfolio" or a collection of 30 shares of the largest companies in America. In general, the indices are different: for example, the 500 most expensive companies The United States, or even a whole set of countries - the index of small-cap enterprises developing countries... Industry - an index of the most expensive companies in the IT sector. In general, the index can reflect anything.

Live chart and price for DJI for today

An interactive online chart of the Dow Jones Index can be viewed here.

Which companies are part of

Companies on the DJ Index are wealthy and respected. 30 giants were included in the group of the largest companies not because they belong to industrial sector, although the full name of the indicator includes this word. The main requirement from companies is to increase profits every quarter for 4 years.

The list of companies changes quite often - about every 2 years, but their number remains unchanged. It is difficult to predict changes, they depend on the company's strategy or global market events. For example, the Dow lineup changed 7 times in 1999, when the world learned about the Internet. The deck was shuffled 25 times during the Great Depression.

The Dow Jones lineup is a regular contributor to the Wall Street Journal. If you want to know more about how indexes differ, take a look.

Index history

Three people came up with an indicator, and it is named after two of them. I restore justice by taking off my hat to Charles Bergstresser (even if he has a surname, you’ll break your tongue). It was he who invented the name "The Wall Street Journal" and became its founder. A businessman, together with two friends - Charles Doe and Edward Jones - opened an agency financial information by investing money saved up in college.

The Charles that Doe became a dad technical analysis, having developed the exchange theory. She is known to all traders because she studies basic indicators.

Charles invited Edward Jones as financial analyst, and in another newspaper in which the journalists worked before their magazine. Edward then also worked as a broker.

At first, the calculation included the papers of 9 railway tycoons, one shipping company and a bank. For this, the then still thin newsletter - only two pages of invaluable information - sold well. The trio of analysts hired 50 employees and opened the newspaper known today. At that time, the indicator estimated 20 companies, not 30, as it is now.

The headquarters is located in New York, the largest exchange is also located here.

Types of DJ

The industrial index DJ DowJones can be written shorter - DJI (and DJIA is by the way futures). We have already understood that it does not apply to industry. Besides him, there are such options:

All time cost and dynamics

In February 2018, the exchange, if not falling, then dropped on one knee: for the first time in 7 years, the Dow Jones index lost 1000 points. Then the Asian stock exchange tightened, for the first time so weak in 15 years. Of course suffered world economy generally. Why?

This indicator is American, and half of all are in the States. exchange transactions... Dow Jones is simple and straightforward, including only market leaders. He is sensitive to political and social events. Therefore, its fluctuations so affect the financial markets.

The Doe's 5 most devastating falls

Financial analysts are susceptible to epithets - "Black Monday", "Black Tuesday", and so on - depending on when the market crashed. His story is one black spot after another.

1. It all started with the Great Depression in 1929 - the Dow Jones weakened by 11% in one day!
2. Then there was a 22.6% drop in 1987. After him, economists began to rewrite the entire market theory: there was no reason for the collapse.
3. The Dow Jones lost roughly the same amount in 1998. This led to inflation in Russia: we lost all our savings.
4. The situation was different on Black Monday 2008. Then the global market lost 46% of its capital. The US mortgage bubble has burst. This was also a market correction, but painful and protracted as much as 2 years. The Dow Jones fell 8% in 2008.
5. In 2018, February became black, from the 7th to the 9th. The US Federal Reserve System (FRS) delighted the Americans with a new report: government bonds became more profitable than before.

In response, investors began to withdraw money to buy bonds. When such an avalanche of shares is put up for sale, the indicator falls. Thus, the market lost $ 114 billion, which is 4% of the Dow Jones. Only the ladies in the news studios panicked, and the investors understood that the market was simply stabilizing.

Trump in the new post strengthened the market, raising the market index by a third: American salaries rose, unemployment decreased. After intensive growth the recession was inevitable.

And each time the crisis in the United States pulls the stock exchanges of all other countries. Fortunately, the growth of the Dow Jones also bodes well for the global market: Asian markets react first, then European ones.

This happened quite recently: in July 2018. The state of the markets began to recover after the threat of a trade war between the United States and China: the countries entered into negotiations on new tariffs. The Dow was the most objective, having risen 2.4% over the week. The reason is that the dynamics of the Dow Jones is focused on imports, not exports, and this is important when discussing a trade war.

Calculation method

How is the index calculated? Dow Jones takes the sum of the stock prices of 30 companies, and then it, by a specific number, to get the average. This number is a correction factor and is shown next to the index graph.

The resulting value is not measured in dollars, but in points. This is no big deal if you are good at managing interest. Some amount is taken for 100 points, or 100%. The amount decreases - points fall. For the index to be seriously affected, several stocks of different companies must fall in price at once.

Advantages and disadvantages

There are a lot of indices in the USA, and they are always compared to DJ performance. Dow Jones himself loves securities with a high price, even if the issuing company is smaller than its portfolio neighbors. So it turns out that the indicator is most influenced by companies with expensive shares, and this is wrong when their capital is modest.

This is due to the correction factor. But he's not that bad. You cannot deduce the arithmetic mean by dividing the amount of shares by 30: then the market dynamics will be overboard.

The index takes it into account at the very least, but shareholders still evaluate Dow Jones against the background of another important indicator- Standard & Poor 500. This is also an index, and it has a basic indicator, unlike the Dow.

How and where to make money on the index

The Index is an old, effective tool used by both billionaires and ordinary people... For example, an inexperienced investor wants to conserve capital. What does the world practice offer?

Buy securities of all companies from the index at once, invest a little on each. If one falls, the other will rise in price. I've written a lot about the easiest way to do this, but you can start. The income, of course, will be the average market, but you can keep your pension - the money will melt away from inflation.

The method is so popular that a new one has appeared financial instrument-. They copy the composition of an index for a portfolio and enclose it in one valuable paper... So, an investor buys one security, and with it a whole portfolio.

The most popular Dow-based funds:

1. DIA by StateStreet
2. UDOW and DDM from ProShares (leveraged)

You can buy such a fund through one of the popular foreign brokers:

Interactive Brokers CapTrader Exante Just2Trade

In fact, the only real large American broker that still works with Russians.