TOPICS > Economy

Dow Jones Breaks 6,000

October 14, 1996 at 12:00 AM EDT

JIM LEHRER: The stock market’s new record is first tonight. The Dow Jones Industrial Average finished above 6,000 points for the first time ever. We get some perspective on that from Jim Angel, a Georgetown University finance professor who studies the stock market. Welcome.

JIM ANGEL, Georgetown University: Thank you.

JIM LEHRER: All right. Let’s begin first of all with the number, itself, 6,000. How does that tabulate? What does that mean?

PROF. ANGEL: Well, the Dow Jones Industrial Average is an index of the stock market. And it’s calculated by taking the prices of 30 of the largest companies in the United States and just simply added together, and then they take the sum of all the prices and multiply it by a fudge factor to take into account stock splits and changes in the index.

JIM LEHRER: All right. And how are those 30 stocks chosen?

PROF. ANGEL: Well, the 30 stocks are chosen by Dow Jones & Company. The Index goes back over 100 years. As a matter of fact, it celebrated its 100th anniversary this year. And it started off as a group of approximately a dozen stocks that at that time were some of the largest and most respected stocks in the United States. And over the years, various companies have changed. They’ve merged. Some of the older ones have been dropped out, and newer companies have been added, but the Dow Jones 30 Industrials includes many of the largest companies–

JIM LEHRER: Such as–

PROF. ANGEL: Such as General Motors and General Electric, IBM.

JIM LEHRER: Now what’s the fudge factor? Why did they do that?

PROF. ANGEL: Well, because from time to time they change the constituents in the Index. For example, if a company disappears in a merger or if they decide that another company is more representative, then what they have to do is in order to keep the index comparable from one day to the next, they need to change the fudge factor to adjust for that.

JIM LEHRER: Now who does that?

PROF. ANGEL: That’s done by Dow Jones & Company.

JIM LEHRER: Now this is a private outfit.


JIM LEHRER: The Dow Jones Company publishes “Wall Street Journal” and all of this, and they do that.


JIM LEHRER: This is not done by the government–


JIM LEHRER: –or anybody regulating anything?

PROF. ANGEL: No. It’s totally private.

JIM LEHRER: Totally private. Okay. 6,000, when was it 5,000?

PROF. ANGEL: A little over a year ago.

JIM LEHRER: All right. Now, the reflection–I mean, the fact that it went from 5,000 to 6,000 means what?

PROF. ANGEL: Well, it basically means that investors are putting their money where their mouth is and voting with their wallet. And what they’re saying is that they think that the United States economy is doing well.

JIM LEHRER: No, I don’t mean that. What I mean–I mean just in simple terms, it means that those 30 stocks–


JIM LEHRER: –plus the fudge factor–


JIM LEHRER: They’ve all grown.


JIM LEHRER: Just in the simplest–

PROF. ANGEL: Right. It basically means stock prices have gone up for these 30 stocks.

JIM LEHRER: Okay. Now, can you take us back in history about when they–when did they start figuring this total, the 6,000 kind of total?

PROF. ANGEL: Yeah. The Dow Jones Industrial Average started in 1896. As a matter of fact, this year is the 100th anniversary of the Dow Jones Industrial Average. And it took 88 years for it to cross the 1,000 mark, and then–let’s see–a fuzzy memory–I believe it was 14 years–

JIM LEHRER: You’re taking the exam, Professor.

PROF. ANGEL: Oh, no, where’s my–

JIM LEHRER: Yeah, but anyhow, has it been–the last–how–give us a feel for after it went to 1,000 how it got to where it is today in terms of just–in terms of how it grew.

PROF. ANGEL: Well, the–when I was growing up in the 60’s, it flirted with 1,000 for the first time, and that was considered to be quite a miracle–quite an amazing level. But then because stock prices are quite volatile, it bounced around in the 70’s, and it took the better part of another decade before it hit the 2,000 level. And then during the 1980’s, you may recall, right around the crash of ’87, it had peaked at 2,700, and then was at the trough down in the 700 range. Then it, it came up a little bit in the early 90’s, and at the beginning of the Iraqi war, it hit another low point and then since then, it’s been on a pretty steady climb since the early 90’s.

JIM LEHRER: Now for those of you who watch the stock market, the professionals now, the experts, has 6,000 been one of those kind of Holy Grails out there, or is it just one of those things that you knew was going to happen eventually anyhow, no big deal?

PROF. ANGEL: I think it’s one of those things. As the stock market has gone up over time, that 1,000 points isn’t what it used to be, that when the stock market was 1,000, a thousand points was doubling the stock prices.

JIM LEHRER: Yeah, if it goes from 5,000 to 1,000, it’s–yeah, I hear you. I hear you. All right now, it went to 6,000 today. It had gone to 6,000 before and only last week but it didn’t close at 6,000.


JIM LEHRER: Now, should, should all of us be terribly concerned if it doesn’t close at 6,000 or above again tomorrow?

PROF. ANGEL: No, because stock prices fluctuate, and that is a normal feature of financial markets, that some days they go up, some days they go down. Now for those of us with our, our retirement money invested in the stock market, one thing we need to remember is that stock prices do fluctuate.

JIM LEHRER: Yeah. All right, now, looking ahead, what do you experts think, how long will it be before we hit 7,000?

PROF. ANGEL: Well, nobody really knows the answer to that, that–I mean, it could happen in a few months, or it may take decades. Nobody really knows.

JIM LEHRER: What is the expectation? In politics, there’s conventional wisdom. What’s the conventional wisdom on this, that we may be–you and I could sit here a year from now and be talking about 7,000?

PROF. ANGEL: We could be. The expectation is that on average, stock prices will go up probably depending on who you talk to anywhere between 6 and 10 percent a year in real terms, that–so we expect stock prices to go up over time as companies continue to invest, as they continue to produce, as they continue to reinvest their dividends. Now, the–but how fast that’s going to happen is anybody’s guess because stock prices are very volatile, and they go not only up they also go down as well, and the reason why stock returns have been so much higher than other asset classes like Treasury bills or government bonds has mainly been because the stock market is a risky place.

JIM LEHRER: Does this number, this record today, this thing we’ve been talking about, does it mean anything in terms of measuring the economy beyond the factors that you have mentioned? In other words, are there psychological things involved in this as well?

PROF. ANGEL: Well, stock prices are often considered a leading indicator of economic behavior because investors invest in the stock market when they expect the economy to do well, when they expect companies to be earning lots of money and paying larger dividends, they’re naturally going to buy stock prices, however, the, um, stock prices tend to be somewhat skittish because stock prices are based on people’s expectations of what those future earnings and dividends are going to look like. And the crowd psychology can change overnight if some bit of news comes out that makes investors think that the world is going to be different than what they thought it was going to be.

JIM LEHRER: And that means the big world, that doesn’t just mean the world of stock prices.


JIM LEHRER: You know, any kind of thing overseas or–

PROF. ANGEL: Exactly.

JIM LEHRER: –political thing, anything could change–

PROF. ANGEL: For example, when Dwight Eisenhower had a heart attack, the stock market dropped 6 percent in one day as a result, so that again, you know, that kind of thing can happen. You never know what’s going to happen.

JIM LEHRER: It’s good to remember that too, sir. Professor Angel, thank you very much.

PROF. ANGEL: Thank you.