The United States is a nation of symbols. Some of them, like the American Flag, are as relevant today as they were when we were first introduced to them. Others, like Plymouth Rock and the Liberty Bell, not so much.
At one time, Wall Street and the floor of the New York Stock Exchange were the centers of the financial world. Now, with the onset of electronic trading, they are symbols of our long-held belief in capitalism. In the same vein, the Dow Jones Industrial Average (DJIA) was the most important measure of stock market performance. But like the Liberty Bell’s crack that rendered it mute, the limited number of issues and the proliferation of market indexes that better measure country, sector, or investment style performance, have supplanted the DJIA’s usefulness as a benchmark for investors. Yet, despite its limited use as a benchmark, for many investors, the Dow is the market. That’s why, despite its fading utility, the history of the Dow Jones Industrial Average is fascinating.
In 1884, Charles Dow created the Dow Jones Industrial Average, a stock market index that measured the daily price movements of 12 well-known, industrial stocks. In 1928 the number of stocks the Dow tracked was expanded to 30. While the names have changed over the years, the number still stands at 30. From the Dow’s inception until the Crash of 1929, a few very powerful, very male tycoons who owned and ran the country’s investment banking firms controlled the U.S. stock market. The masses either didn’t know anything about stocks or believed that stock investing was only for those who were rich.
As the country made its way from the 19th to the 20th century, U.S. business was changed. The country’s agrarian economy evolved into an urban, industrial economy. With business booming, the 20th century’s first entrepreneurs, the industrialists, turned to Wall Street’s kings for capital. Then came World War I, which was costly both in terms of lives and dollars. To pay for the war, the government issued bonds. Patriotic, regular folks heard about how important it was to buy war bonds and did so in droves, as evidenced by the explosion in the number of Americans who owned war bonds – 350,000 in 1917 to 11 million in 1919. The war bond initiative, the first great U.S. investment offering, was so positive for Main Streeters that when the bonds matured, they turned around and purchased more corporate bonds and some stocks, depositing less in local banks.
Through the 1920s as the economy prospered, now so did the masses. Intrigued by advertising, obsessed with the miracle of mass production, and in awe of machines that could make our lives easier, Americans exercised their constitutional right to buy on credit and went on a consumption binge. But soon, the Roaring Twenties went out with a whimper when stocks, bonds, and the economy tanked.
Although institutions owned more common stock than average Americans during The Crash, many of the country’s citizens were left financially destitute by the market downturn and the country’s economic upheaval. Soon it became obvious to lawmakers that when it came to the flow of information, We the People were at the end of the line and suffered as a result. To level the playing field, Roosevelt’s Congress passed the Securities Act of 1933, a law that required registration of securities and thorough disclosure; thereby eliminating one of the advantages enjoyed by the Wall Street “fat cats.” The Act of ’33 was the first of many victories for the masses!
From the 1940s through the mid-1970s, the masses remained a “bit player” in stock market drama. Though no longer controlled by just a few men, the market was still controlled by a limited group of powerful investors– corporations and institutional investment firms that underwrote stock offerings and managed pension funds.
But in the mid-1970s, a change took place that set the stage for the rise of the small investor as corporate America shifted its focus. Not comfortable being restricted by borders, corporations began to think and do business globally. But to effectively compete, they had to become lean and mean by cutting expenses which they did in two significant ways. First, they eliminated jobs and moved others offshore. Second, they discontinued pension plans in favor of defined contribution (401(k)) plans, transferring the decision-making responsibility and resulting investment performance from them to us. Americans didn’t know it at the time, but that strategy relieved corporations of their life-long financial responsibility for their employees and forced us to take responsibility for our financial lives. Those changes, for the first time, shifted control of investment markets from the few to the many.
Some say the democratization of investing took a long time but that’s not the case. It took the few 88 years to get the Dow to 1,000, but it only took us less than 50 years to move the Dow Jones Industrial Average from 1,000 to an unbelievable 30,000. This feels like a nice moment to note that as we expanded accessibility to the masses—who at one time were barred from the world of investing—the Dow Jones Industrial Average, America’s symbol of capitalization, reflected the influence of “We the People.”
Dec. 2020, Thornburg Investment Management - Jan Blakeley Holman, CFP®, CIMA®, ChFC, CDFA, CFS, GFS®, Director of Advisor Education
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