The Dow Jones Industrial Average (DJIA) is arguably the most followed index across the globe. It is used by individual investors, market analysts, traders and other professional money managers as a performance measure for the entire stock market. Launched in 1896, the Dow was designed to mimic the health of the overall U.S. economy with one number. Today it is composed of 30 stocks that trade on either the New York Stock Exchange (NYSE) or Nasdaq.
When you hear business news feeds referring to the market being up or down a certain percentage, usually the newscaster is referencing the performance of the Dow. The index is weighted by price, so stocks with higher share values will have greater influence on the DJIA performance than those with lower values. For this reason, the Dow has received scrutiny over the years for not providing an accurate representation of the market, because when the highest priced stock in the index has a massive gain/loss, it will have a major impact on the performance of the index.
As the Dow is designed to measure the economic condition of the United States, companies within the index occasionally change to provide a more accurate representation. The reasons companies are removed from the index include sectors falling out of favor, the stock no longer meeting the DJIA index requirements or the company receiving some form of government stimulus. A recent example, Kraft Foods, was removed from the index and replaced with UnitedHealth Group; the change was intended to reflect the increase in U.S. healthcare spending. Since inception, several other large corporations have been removed from the Dow, as well.
One of America's largest car manufactures was removed from the Dow on June 8, 2009. The decision was mandatory as GM filed for bankruptcy protection days prior. When the announcement was made, the stock had fallen around 77% in 2009 and 87% in 2008, which was the year that GM was crowned as the worst performing stock in the Dow. Entering the DJIA in 1915, General Motors maintained the second-longest streak for a stock in the index, behind General Electric.
Once the world's largest financial firms, Citigroup was also removed from the index on June 8, 2009. The stock price plunged during the credit crisis, dropping nearly 85% from January 2008 to May 2009 and losing over $100 billion in valuation from 2006 to 2009. The financial giant received $45 billion in bailout funds by the U.S. government, earning the latter a 34% interest in Citigroup. The firm was dropped as a result of the restructuring but could be considered again in the future.
American International Group
Added to the DJIA on April 8, 2004, AIG had one of the shortest-lived stints on the Dow in 75 years. AIG lasted until only Sept. 22, 2008. Ironically, AIG was replaced with Kraft Foods, which only lasted about four years on the index. AIG was removed after the government injected the insurer with stimulus funds. The firm's assets began to evaporate as credit default swaps began defaulting and AIG needed to cover more than $440 billion in bonds. AIG had nowhere near enough money to cover the bonds and the U.S. Federal Reserve stepped in, providing $85 billion in bailout funds in exchange for 79.9% equity stake in the company.
With a history dating back to 1878, the Kodak camera was born in 1888 and became the first simple consumer camera. Kodak founder George Eastman created snapshot photography and coined the slogan, "You press the button - we do the rest." Kodak quickly became a dominate force in the industry and the Dow welcomed the camera maker to the index in 1930. However, Kodak's market share deteriorated with the growth of digital photography. The camera maker was removed from the DJIA in April 2004, after it no longer played an important role in the lives of American consumers. It marked nearly 75 years on the index.
The Bottom Line
The Dow is designed to provide the financial community with a quick snapshot of the overall economic health of the United States. As technology advances and industries change, this creates an imbalance in the Dow's ability to provide an accurate representation of the economy. According to Dow Jones Indexes editor, John Prestbo, "There are no pre-determined criteria for a stock to be added or deleted, though we intend that all components be established U.S. companies that are leaders in their industries." Over the years, most stocks removed from the index have received government aid or its industry has diminished.
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