The Complexities of Keeping the Dow Jones Afloat in a Crisis and Why It Matters

Stock markets and those that play the trading game are used to swings. If it’s not one thing sending stocks into freefall, it’s another causing them to surge. The first half of 2020 proved to be a stark reminder of that fact. With major financial markets close to collapsing, much of the trading talk centered on whether they would recover and, if so, how.

Of all the markets, the Dow Jones stands as one of the most important. On the surface, it tracks the combined value of 30 companies in America. With the likes of Boeing, American Express, and ExxonMobil making up its value, there’s more than $8 trillion worth of business being tracked.

Much More than a Stock Market

However, the index is much more than that. Because the Dow Jones Industrial Average consists of 30 corporations from a variety of industries, it’s often seen as more than a financial market. In many ways, it’s a reflection of not just the US economy but the world’s. With the US holding such a powerful position within the world at large, a tough day for the Dow Jones often leads to a bad day for all countries.

READ  Another Finance Executive To Bid Farewell To Tesla

Of course, there are those that say too much emphasis is placed on the Dow Jones and that 30 companies are too few to judge the strength of an economy on. However, if you look back at the history of the Dow Jones Industrial Average (DIJA), it was always designed to provide a snapshot of the US. When Charles Dow calculated the average index of the largest industry stocks in 1896, he wanted to paint a picture of the economy. Throughout the boom and bust years (1914-1960), the index grew in significance to the point where it’s now regarded as the marker for global economic health.

What this means is that the state of the DJIA and its future prospects are important for everyone, not just traders. 2020 saw the Dow Jones reach an all-time high of 29,551.42 points before it collapsed. From the highs of January, it lost more than 2,000 points in early March. Global health issues and an oil price war between Russia and Saudi Arabia crippled the markets. By April, the outlook was bleak. This, in turn, caused economists to forecast economic troubles deep into 2021.

READ  Forex demo trading account – a good way of becoming an expert in forex trading

All Parts Contribute to the Greater Whole

Image: Pixabay

However, in what seemed like an overnight switch (although it wasn’t), the index started to rebound. As flights started to resume, Boeing stocks started to rise. For many analysts, travel fuels the Dow Jones. In some ways, the fortunes of the index rise and fall based on oil and commercial flights. If people are travelling on roads and in the air, the DJIA has a shot at recovering from any crisis.

In fact, when these two pieces of the puzzle fall into place, it has a domino effect. If people are willing and able to travel, they can work. When they can work, the economy gets stronger. The Dow Jones will reflect this. Indeed, positive US job data in June 2020 directly correlated with an uptick for the Dow Jones. As the number of new unemployment insurance claims dropped from 2.13 million to 1.9 million, the DJIA gained 11.93 points.

READ  Things You Need to Know Before Investing in IPOs

A Complex Economic Puzzle

So, what does all this suggest? The simple answer would be that the index and, therefore, the economy, are powered by people. If people are mobile, the Dow Jones will move in a positive direction. However, the more nuanced argument is that the DJIA doesn’t rise and fall because of one thing. Even in this brief examination of the index, the links between travel, fuel and employment have come to light.

While these areas can be held up as ways to keep the index strong, they don’t operate alone. Everything is connected. That, in reality, is the power of the Dow Jones and why it’s a great economic marker. As Aristotle said, the whole is greater than the sum of its parts and that’s certainly true when it comes to the DJIA.

Leave a Reply

Your email address will not be published. Required fields are marked *

Related Posts