(News Bulletin 247) – The Dow Jones, or Dow for the most seasoned stock marketers, still remains the emblematic index of the American markets. But failing to have evolved with the transformation of Wall Street, this venerable index harkens back to ancient times.

Since Friday, Nvidia has been an integral part of the Dow Jones, one of the famous Wall Street indices with the S&P 500. The graphics processor specialist has thus joined Amazon, Apple and Microsoft, the three other technology companies already present in the index. .

Above all, this promotion is to the detriment of its competitor Intel, punished on the stock market for having delayed in the development of chips adapted to artificial intelligence.

“Nvidia is a well-run company and its entry into the Dow shows how powerful its turnaround has been in recent years because it was in the right place at the right time when no one else was,” said Scott Colyer, managing director of Advisors Asset Management at Bloomberg.

Indeed, there is no shortage of superlatives to characterize the inexorable rise of the graphics card specialist on the stock market. Nvidia grew over the year by more than 200%, boasts a market capitalization of $3,630 billion, and has once again become the largest listed company in the world ahead of tech icon Apple

according to companiesmarketcap.com. For the graphics processor specialist, this promotion is therefore a real stock market consecration.

“For most people, the Dow is synonymous with the stock market,” market strategist Art Hogan was quoted as saying by CNN. Same comment from Nick Colas, co-founder of the market research company DataTrek, who reported to the American media that the number of searches on Google for “Dow Jones” is always higher than for “S&P 500”.

The most famous clue

This is because the Dow Jones Industrial Average (DJIA) in its full name – often shortened to Dow Jones – is one of the oldest stock indices since it will celebrate its 130th anniversary in 2026.

When it was created in 1896 the sample contained 12 titles. But since 1928, it has included thirty securities from the New York Stock Exchange (Nyse). The stocks are chosen for their representativeness, notably their market capitalization within each sector. The Wall Street Journal and S&P Global teams are responsible for choosing stocks. Companies in the transport or community services sectors (since they are present in specific indices) are excluded from the index. To enter, companies must both demonstrate a long history of growth and enjoy broad interest from investors.

A relic of ancient times

To calculate the index, Charles Dow, publisher at the Wall Street Journal, and Edward Jones, his partner, at the origin of this index, did not seek to complicate their lives. They simply chose to take the average (Average) of the prices of 12 stocks each representing one of the main so-called industrial sectors (Industrial) – excluding the railways, which then represented the majority of the rating and already represented in the Transportation Index. Or the addition of the prices of the twelve chosen securities divided by 12. Since then, the principle has remained the same, but the terms of the operation have changed.

So to the numerator we now add the prices of no longer 12 but 30 titles: so far nothing complicated. But at the level of the denominator things have become more difficult over the years. In fact, each financial transaction (exceptional dividends, nominal split, etc.) modified the nominal value of one or other of the securities in the sample, leading to restatement. This denominator (called the Dow “divisor”) was very precisely 0.1517, in January 2023, according to Forbes.

In other words, the sum of the 30 prices is no longer divided (the denominator having become less than 1 in 1986) but multiplied by a factor of approximately 6.59. The index no longer gives an average, but a product, which explains why its value is now higher than the total prices of the thirty stocks referenced. Note that until 1963 the calculation was carried out by hand and displayed only once an hour, before being computerized.

With the Japanese Nikkei 225, also relatively old (1949), it is one of the rare stock indices to retain this methodology. But this method of calculation gives rise to some rather eccentric situations…

For example, Microsoft, Apple and Amazon are less well represented in the index, while Goldman Sachs benefits from a disproportionate weight in the Dow Jones simply because its nominal price is particularly high (a bit like ID Logistics, with its of more than 400 euros, was the third weighting of the French SBF 120).

It is important to understand that the DJIA is not representative of the market capitalization of the companies that make it up and that it therefore only constitutes a very random sample of the entire American market.

“The Dow is without a doubt an anachronistic index,” Daniel Alpert, managing partner of Westwood Capital, told CNN

The S&P 500, the flagship index for financial professionals

For managers, it is therefore the S&P 500, created in 1957, which is the best barometer of the health of the American stock market. This index is based on a much larger sample (currently 503 securities, representing nearly 80% of the total capitalization of Wall Street) whose components are weighted according to their real capitalization.

To be included in this index, the company must have a market capitalization greater than $18 billion and positive net profit over the last quarter as well as over the last four quarters, in American accounting data (US GAAP). The rules set by S&P Global also imply that a company must be “domiciled in the United States” to integrate its reference indices.

But investors are sometimes surprisingly sentimental and the Dow remains popular in the media and with savers: more than 32 billion dollars are to date invested in the main tracker intended to replicate its performance, the SPDR Dow Jones Industrial Average ETF.