by Meghan Councill

I want to start today with some facts about the Dow Jones Industrial Average, also known as the Dow or DJIA; a bit of history, the point system and who is included. If you turn on the nightly news, they typically recap the performance in the Dow for each day. The stock market opens at 9:30 a.m. and closes at 4 p.m. Monday through Friday. The move in points from open to close captures whether the market is up for the day or down.

If you remember from a previous column, Charles Dow started the index in 1896 making it the oldest and one of the most well-known stock market indices. Most people think of the Dow as a representation of the overall market conditions. Back in 1896, there were only 12 stocks included in this average and simple math was put to work.

The theory behind Charles Dow’s creation of this index was that he believed information about companies and the economy is reflected, rather quickly, in the market prices of stocks. He began to chart closing prices of these companies and then could see patterns in the market, thus beginning technical analysis of the market. We look for uptrends and downtrends in the market and, although historical performance cannot be indicative of future results, we look for these patterns to help understand the market cycle and where we are in it.

Two other components of the Dow Theory are that the averages must confirm each other. As a way of checks and balances when drawing any conclusion, you will look at other averages to confirm a suspected trend in the market. Volume should also confirm a trend. The volume of trading should increase in the direction of the major trend. For example, if we are experiencing an uptrend, volume should increase during rallies and decrease during declines. However, if we are experiencing a downtrend, volumes would increase during declines and decrease during rallies.

Today, the Dow is comprised of 30 North American stocks. They range across many sectors, but per the name about two-thirds of the companies on the list are in industrials or consumer goods. Sectors left out of this index are utilities and transportation.

For those sectors, there are two other indices, namely, the Dow Jones Transportation Average (DJTA) and the Dow Jones Utility Average (DJUA.) You may also hear of the Dow Jones Composite Average, which is based on all 65 stocks in the previous three averages. Once a stock has made it on to the list, it does not necessarily stay forever. Stocks can be added or deleted from the list. Common characteristics of the companies on the list are that they have a long track record of growth and have investor interest.  The last exchange of names happened in March 2015 when AT&T Inc. (NYSE: T) was dropped and replaced with Apple Inc. (NYSE: AAPL.)

In the last several weeks, we have seen more volatility in the market than we have in years. Several headlines stated that it was Dow’s worst single-day point fall ever; bold statement. On Monday, Feb. 5, the market did drop 1,175.21 points, which was the largest single-day drop in points in the Dow Jones Industrial Average history. I want to keep headlines like these in perspective. Yes, there were two trading days with large points declines, but still both days still pale in comparison to Black Monday in 1987, the financial crisis of 2008 or the market crash in 1929 in percentage terms. With the market at all-time highs, larger points drops in reality are smaller percentage drops. On Black Monday in 1987, the Dow fell 22.6 percent and in 1929 when the market crashed, it was down 12.8 percent. On Feb. 5, 2018, the market declined 4.6 percent.

Though not the biggest percentage drop, the past several of week have gotten our attention. We have been in a steady uptrend since the election (even before) and we have gotten used to this trend with very little pullback. So, why has the market reacted recently? I believe reasons include concerns over rising interest rates, worries of higher inflation, the new Fed Chair, Jerome Powell took over, and concerns over rising wages. And despite what the reason is at any given time, we have to remember that volatility is a normal part of the market cycle.

When I started as a broker at Davenport & Company, my Grandpa Wiggins asked me what I was going to tell clients when they asked me if I knew what the market was going to do. I gave him a very politically/professionally correct answer about how we cannot predict future results and how we must try to manage risk, etc, etc. He said, “Wrong.” He told me I should tell the truth and said, “The market is going to go up and the market is going to come down, that’s just what it does.”

I think there is a lot of value in his sage advice. We have been used to the markets climbing up for some time now, but they cannot and may not go up forever. We must be vigilant about making the appropriate investments for our risk tolerances and needs but then we must remember, if positioned correctly we will ride many market cycles and the value of our investments will go up and will also go down at times because, as my grandpa said, “that’s just what the market does.”

Please feel free to send questions and comments to me at mcouncill@investdavenport.com.

MEGHAN COUNCILL is a Registered Representative with Davenport & Company LLC. Member NYSE-SIPC-FINRA

The information provided is for information purposes only and should not be considered an individual recommendation or personalized investment advice. Each investor needs to review his or her particular situation. Data contained here is obtained from what are considered reliable sources; however, its accuracy, completeness or reliability cannot be guaranteed. Investing in stocks and the equities market always carries risk. Equities are subject generally to market, market sector, market liquidity, issuer and investment style risks, among other factors, to varying degrees.

The statements and opinions expressed in this article are those of the authors as of the date of the article, are subject to rapid change as economic and market conditions dictate, and do not necessarily represent the views of Davenport & Company LLC. This information may contain forward looking predictions that are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. This article does not constitute investment advice, is not predictive of future performance, and should not be construed as an offer to sell or a solicitation to buy any security or make an offer where otherwise unlawful. Investing always carries risk.

Past performance is not indicative of futures results.

An index is not available for direct investments; therefore its performance does not reflect the expenses, fees and taxes generally paid with the active management of an actual portfolio.

The Dow Jones Industrial Average (DJIA) is an index of 30 “blue chip” stocks of U.S. “industrial” companies.

The Dow Jones Transportation Average (DJTA) index is a price-weighted average of 20 transportation stocks traded in the United States.

The Dow Jones Utility Average (DJUA) is a price-weighted average of 15 utility stocks trade in the United States.

The Dow Jones 65 Composite Average is an index that measures changes within the 65 companies that make up three Dow Jones averages: the 30 stocks that form the Dow Jones Industrial Average (DJIA), the 20 stocks that make up the Dow Jones Transportation Average (DJTA) and the 25 stocks of the Dow Jones Utility Average (DJUA).avenport.com.