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  < Back to Contents
  Chapter Fourteen:

  Gross Domestic Product
  Business Cycles
  Business Revenues
  Trading Volume
  Dow Jones Average
  Crude Oil
  Energy Consumption
  Imports and Exports
  Foreign Investment



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Dow Jones Average

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In the first five decades of the century, the Dow Jones Industrial Average rose almost 250 percent. In the subsequent five decades, the average rose by more than 4,700 percent.

The Dow Jones Industrial Average, commonly known as “the Dow,” is a weighted composite of the prices of the common shares of thirty large industrial corporations. Some corporations are added or deleted from time to time as corporate circumstances change (Microsoft and Intel made the list in 1999), but the number of stocks remains at thirty. These thirty stocks alone represent about a fifth of the value of all stocks in the United States. 

Although there are many other indexes of stock prices, the Dow commands more attention in the news media than all of the other indexes combined. The investing public, moreover, typically accepts the Dow as the basic measure of all stock prices. 

Nothing in the history of the American stock market compares with the Dow’s elevenfold rise from 1982 to 1999. Accompanying this extraordinary growth were a decline in dividend yields and an increase in price-earnings ratios. The dividend yield of the Standard and Poor’s 500 fell from 5.8 percent in 1982 to 1.3 percent in 1999. In the same period, the average price-earnings ratio increased from 8 to 32. 

The rise in stock market volume and value was partly attributable to two forms of tax-sheltered savings authorized by Congress in the 1970s—Individual Retirement Accounts and 401(k) plans. The combined assets in these special accounts, measured in constant dollars, rose from $300 billion in 1985 to more than $2.5 trillion in 1997, with a large proportion invested in common stocks. 

Another factor that stimulated the equities market was the rapid growth of mutual funds, which combine the contributions of individual investors into large funds with stated investment objectives. By 1998, there were more than 3,500 equity funds (principally invested in stocks) and a like number of income, bond, and money market funds. The equity funds alone held assets of more than $3 trillion. In addition to household investors, mutual fund investors also included nonprofit organizations, business corporations, labor unions, bank-administered trusts and estates, private pension funds, credit unions, and state and local governments. 

Other factors probably contributed to this phenomenal rise in equity values. For example, the baby boomers—the largest birth cohort in American history— recently entered the period in life when people focus on asset accumulation.

Chapter 14 chart 5

Source Notes
Source Abbreviations

SA 1959, table 465, and Phyllis S. Pierce, The Dow Jones Averages, 1885–1990 (New York: McGraw-Hill, 1991). See also Dow Jones Indexes: The Markets’ Measure at (accessed September 4, 2000). For dividend yields and price-earnings ratios, see Council of Economic Advisers, Economic Report of the President 2000 (Washington, D.C.: GPO, 2000), table B-93. For the number of equity funds, see U.S. Industry Total, section 1, at (accessed September 28, 2000).


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