Dow Jones and NASDAQ Composite, implacable heralds of depressions and crises

Who could ever imagine that the lives of people would depend on the figures reported in the investment market indices abundantly available today? Being at first sight just the usual numbers they however reflect the most important events in the world economy. Almost 80 years ago a prominent index known as Dow Jones Industrial Average or DJIA displayed horrible data in its charts, the data that marked the beginning of Great Depression. What about our current life? How the financial crisis is reflected in DJIA and other sources? And what these figures mean to us today?

The Dow Jones Industrial Average is one of several stock market indices, created by nineteenth-century Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow. Dow compiled the index to gauge the performance of the industrial sector of the American stock market. The average consists of 30 of the largest and most widely held public companies in the United States. The "industrial" portion of the name is largely historical—many of the 30 modern components have little to do with traditional heavy industry. The average is price-weighted. To compensate for the effects of stock splits and other adjustments, it is currently a scaled average, not the actual average of the prices of its component stocks—the sum of the component prices is divided by a divisor, which changes whenever one of the component stocks has a stock split or stock dividend, to generate the value of the index. Since the divisor is currently less than one, the value of the index is higher than the sum of the component prices.

At the moment apart from DJIA there is a number of other authoritative indices used to check the condition of the world financial and industrial markets. Among them there is a prominent NASDAQ Composite.

The NASDAQ Composite is a stock market index of all of the common stocks and similar securities (e.g. ADRs, tracking stocks, limited partnership interests) listed on the NASDAQ stock market, meaning that it has over 3,000 components. It is highly followed in the U.S. as an indicator of the performance of stocks of technology companies and growth companies. Since both U.S. and non-U.S. companies are listed on the NASDAQ stock market, the index is not an exclusively U.S. index.

When DJIA was first published, the index stood at 40.94. It was computed as a direct average, by first adding up stock prices of its components and dividing by the number of stocks in the index. On September 3, 1929 it showed 381.17. The crash of 1929 and the ensuing Great Depression returned the average to its starting point, almost 90% below its peak, by July 8, 1932, at its intra-day low of 40.56; closing at 41.22.

In just one day the NYSE saw a sale of 13 million stocks! And later on Tuesday 29 the market crashes on volume of over 16 million shares and Dow Jones Industrial Average falls more than 11%! The high of 381.17 on September 3, 1929, would not be surpassed until 1954, in inflation-adjusted numbers.

Today both DJIA and NASDAQ Composite are far above those scanty figures that were at the starting point of the 30 companies index. But the situation is not better anyway.

As of November 19 close NASDAQ Composite stands for 1,386.42. It is 96.85 points or 6.53% lower than a day before and 1,250.82 points or 47.43% below November 20 a year ago. On November 20, 2007 NASDAQ Composite stood for 2596.81 while DJIA stood for 13010.14. As of November 19 close DJIA stands for 7,997.28, which is 427.47 points or 5.07% decrease against the day before and 5179.51 points or 39.31% lower than on November 20 previous year. To compare: on November 24, 2006 NASDAQ Composite stood for 2460.26 and thus by November 20, 2007 the index increased 207.09 points or 8.67%. On November 24, 2006 Dow Jones stood for 12280.17 and it respectively increased 667.59 points or 5.41% by November 20, 2007.

A very strange proportion. While within a year the indices rose only 8.67% and 5.41% within another year they fell 47.43% and 39.31% and this is the case taking into consideration that the number of stocks and companies add constantly! Thus with more stocks and companies today we have a 39.31% decrease in Dow Jones, what does it mean? Who knows? So far the situation is denoted as a ‘crisis’ and we can only wait till the time will show us if it was another depression.