Charles Dow Must Be Rolling in His Grave

Includes: AIG, AXO, BAC, C, DIA, JPM
by: Charting Stocks

Have you ever asked yourself why the Dow Jones Industrial Average contains non-industrial stocks? Why such a large weighting is given to financial companies such as American Express (NYSE:AXP), Bank of America (NYSE:BAC), Citigroup (NYSE:C), (NYSE:JPM) and AIG (before its removal)? After all, you wouldn’t expect to see General Motors (NYSE:GM) included in the healthcare index or Goldman Sachs (NYSE:GS) in the home builder index.

The Wikipedia entry for the Dow Jones Industrial Average states that:

The average is computed from the stock prices of 30 of the largest and most widely held public companies in the United States. The “industrial” portion of the name is largely historical—many of the 30 modern components have little to do with traditional heavy industry.

We do not dispute the claim that the “industrial” portion is largely historical. Indeed, there are components which have little to do with industry. Financial companies, which do not produce anything, comprise a large weighting the in this average of American Industry.

Over the last 20 years, the Dow Jones has been reshaped into a basket of 30 conglomerate corporations with little regard for the actual business they’re in. Today’s Dow Jones would be unrecognizable to the man who created it over a century ago.


The index was first published in 1896 by Charles Dow, Founder of the Dow Jones Company and Wall Street Journal. Mr. Dow created and monitored a list of important industrial companies. Along with the Industrial Average, he created the Railroad Index (Transportation) which he tracked along with the industrial stocks to gauge the health of the economy.

The Dow Theory was created based on the notion that both indexes should rise together in a healthy economy. The concept was a simple one. While industrial companies made the goods, the rails transported those goods to market. One couldn’t function without the other.

The original Industrial Average contained 12 industrial (Producers of goods) stocks:

- American Cotton Oil Company
- American Sugar Company
- American Tobacco Company
- Chicago Gas Company
- Distilling & Cattle Feeding Company
- General Electric
- Laclede Gas Light Company
- National Lead Company
- North American Company, (Edison) electric company
- Tennessee Coal,
- U.S. Leather Company
- United States Rubber Company

Notice that all of the companies in the index were producers of goods. There were no financial or bank stocks included in the average. At the time of his death in 1902, Charles Dow’s industrial average contained 12 stocks which were comprised of industrial producing companies such as US Steel, US Rubber, National Lead, American Car and Foundry, etc. Still no banks.

The Dow Jones Begins to Change

80 years after the death of Charles Dow, American Express was added to the Dow Jones Industrial Average. This marked the first time that a financial stock was added to the century old index.

American Can, a manufacturer of tin cans merged with Commercial Credit Corporation and adopted the name Primerica.

JPMorgan was introduced to the Dow Jones in 1991 and replaced Primerica Corporation.

Travelers Group was added to the index. The company would later change its name to Citigroup.

AIG was added.

Bank of America was added.


We struggle to find an explanation as to why such changes were made. Was it because America became de-industrialized over the last quarter century? Was it merely a reflection of big business today, with companies such as General Motors and General Electric playing dominant roles in non-core businesses such as finance and banking? Or were these financial stocks added to the index in hopes of propping up its value with companies such as JPMorgan and AIG, whose earning power seemed indestructible? Our hunch is that it was a combination of each.


Since the premise of Dow’s Theory is based on the relationship between the producers of goods (Industrials) and the shippers of goods (Transportation) it is important that the underlying components of these two sister averages reflect their intended purpose. How can market technicians apply Dow Theory today when the industrial average is NOT made up of industrial stocks? The theory is obviously flawed and has been for the past 2 decades. This may explain some of the notable false, or late, signals given over the past 20 years.

Would Charlie Dow’s industrial index be trading at 6,500 today? The chart below suggests that it wouldn’t. Sure, in a bear market all stocks go down though some more than others. This collapse was led by the bank stocks. If the Dow Jones Industrial Average was made up of industrial stocks, as intended, it would have avoided the loss of nearly 100% in AIG, 97% in Citigroup, 92% in Bank of America, 80% in American Express and 57% in JPMorgan, all of which performed worse than the index itself.

Market technicians may need to rethink the application of Dow Theory and find an alternative measure to gauge industrial stocks. The Dow Jones Industrial Average of today is neither industrial nor consistent with the applications of its founder Charles H Dow.