The Dow Jones Industrial Average, or simply the “Dow,” does not indicate the state of the economy and it does not indicate the state of the stock market. So, why do we care about it?
The Dow is the average of the value of one share each of 30 of the largest companies in the United States, writes Trent for The Simple Dollar.
The Dow Jones & Company uses a scaled average, in which they keep track of past splits and multiply the values of each share. In this way, the Dow average is maintained despite any changes to market value of company shares – the most common change being share splits. Trent summarizes the Dow as a “quick summary of the current value of shares of 30 large companies.”
The value of shares depends on supply and demand. However, information about the economy or a specific company also play a key role in causing shifts to supply and demand.
Investors tend to buy/sell depending on future expectations. Therefore, the value of the Dow often decreases before poor economic news, such as the unemployment rate. The value of the Dow often increases before auspicious economic news. If there are any signs that the economy is slowing or accelerating even a bit, the Dow will fall or rise, respectively. (Grim unemployment numbers).