Urban Wealth Management
Can we see patterns from one year to the next, or is it a maddening bracket?
Newspapers, radio, and TV news programs refer to the Dow Jones Industrial Average every day, calling it the Dow, sometimes the Dow Jones or even the DJIA. Economists and financial advisors pay close attention to its daily changes and the longer trends. But what exactly is the Dow Jones Industrial Average? Does it really matter? And can one see performance patterns from year to year?
A Brief History of the DJIA
The Dow Jones Industrial Average is a stock market index, used to assess movements in the market and its overall strength or weakness. It was created in 1896 by Wall Street Journal editor and co-founder of Dow Jones & Company, Charles Dow.
The Dow tracks the market performance of 30 large American companies. Initially, the Dow had only 12 stocks. These included such golden oldies as American Cotton Oil Company, U.S. Leather Company, and Distilling & Cattle Feeding Company. In 1920, the Dow expanded to 20 stocks and then to 30 stocks in 1929.
The Dow is constantly changing, although additions and deletions don’t happen very often. The last change was in August 2020 when Salesforce.com replaced ExxonMobil, and two years before that when Walgreens replaced General Electric. Due to its age, the Dow Jones Industrial Average represents a continuous chart of our nation’s economic growth, along with its ups and downs.
Consider these milestones:
- The Dow first hit 1,000 in late 1972
- Hit 10,000 in March of 1999
- Reached 17,000 in July of 2014
- Closed above 25,000 in January of 2018
- Closed a whisper short of 33,000 on March 15, 2021 (closed at 32,953) — almost exactly where the Dow closed one year later (closed at 32,945 on March 14, 2022)
Let’s Play March Madness with the DJIA
Some people think it’s a good idea to buy last year’s best Dow performers, figuring they will continue to perform well and reward investors. Others prefer to buy last year’s worst Dow performers, thinking their fortunes will magically reverse.
We can play our own version of March Madness and rank the top companies in the Dow based on 2021 performance. Using performance from 2021, here are the best and worst performers from the Dow.
2021’s DJIA Winners and Losers
Let’s be honest for a second: in 2021, the DJIA delivered one of the most surprising years in recent history. While many were happy to see 2021 in the rear-view mirror, the 2021 performance for the Dow was nothing short of impressive, especially given the headwinds of COVID-19. Who could have predicted that in 2021 the DJIA would rise 18.7%? Maybe 2021’s 5 best- and worst-performing stocks from the DJIA can inform us?
Surprisingly (or maybe not), there were some very big winners in 2021, including Home Depot and Microsoft, which both posted gains upward of 50%. In addition, within the 30-stock DJIA, 2021 saw 25 record-positive performances based on 2021 total return, including these top 5:
- Home Depot +59.5%
- Microsoft Corporation +52.5%
- Goldman Sachs Group +47.6%
- Chevron Corp. +46.3%
- Cisco Systems +45.8%
On the other hand, 5 of the 30 DJIA companies lost value in 2021. Here are the Dow’s losers based on 2021 total return:
- Honeywell International -0.3%
- Visa Inc. Class A -0.3%
- Boeing Co. -6.0%
- Verizon Communications -7.5%
- Walt Disney -14.5%
What Financial Advisors Will Predict
Let’s be honest. Did you think Home Depot could skyrocket more than 50% last year and that Boeing would lose 6%? Or the year before, did you think Apple could skyrocket more than 80% and Boeing would drop over 33%? Do you remember that just a few years ago, Boeing was the top performer in the Dow, with a return better than Apple’s as it rocketed up 89% in 2018?
But here is what financial advisors do know: every large, powerful company has good and bad years — and trying to determine future performance based solely on past performance is a bad idea.
So who will be the best performer for the rest of 2022? It’s anyone’s guess. Hence, the Madness. And the reason mutual funds are so popular.
Content provided by Financial Media Exchange. Copyright 2022 FMeX. Used with permission.