How the Dow Jones Industrial Average reflects the stock market performance

What to expect from the Dow Jones index?

By Raed Alkhedr | @raedalkhedr | 19 April 2023

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  • The Dow Jones index was last seen stabilizing near the 33,400 levels

  • Its biggest collapse was in 1929, where the index lost about 50%

  • Stock markets have seen strong fluctuations since the beginning of the year

The Dow Jones Industrial Average is the oldest stock market index in the United States and the oldest in the world. It now tracks the performance of 30 of the largest publicly traded companies on the New York and Nasdaq stock exchanges.

The Dow Jones index was first created in 1885 by Charles Dow and Edward Jones as the Dow Jones Transportation Average. It was then published on May 26, 1896 under its current name (Dow Jones Industrial Average) with a basic value of 40.94 points.

Apart from being the oldest American index, the index measured the performance of the industrial sector in the US, becoming a key indicator of the economy. It is determined based on the weighted average stock price of the largest 30 companies in the United States.

The Dow Jones index has been disrupted more than once by political and economic conditions in the world. Whereas the biggest collapse was in 1929, losing more than 50% of its value due to the economic recession that hit the US for four years. It didn't return to its real level before the crisis for another 20 years. The index also collapsed in 1987, where it lost 22% in one day and then rose again.

A state of uncertainty dominates markets in 2023

The index fell by about 8.8%, which marks the third largest drop in the twenty-first century. Over the course of the year, the stock market has been subject to notable fluctuations. At first, the US Federal Reserve highlighted the importance of increasing interest rates, as economic indicators appeared to justify this course of action.

Since the start of the year, the US Federal Reserve has increased interest rates twice, each time by 25 basis points. This move has negatively impacted stock indices, particularly the Dow Jones index. As US interest rates continue to climb, this adds pressure on stock performance and prompts investors to favor low-risk assets such as the US dollar over higher-risk options like stocks.

In February, US stocks experienced their largest decline since December, with the Dow Jones index plummeting by 700 points. This drop was primarily driven by increased risk aversion, which arose from the Federal Reserve's persistent stance on raising interest rates. This resulted in added pressure on the performance of companies, along with concerns about an impending recession on the horizon.

Following the drop in the stock market, concerns about the banking crisis and the contagion of banks caused fears of a recession to escalate. Despite the reasons some see as related to poor bank management, fears of bank contagion remain a significant issue.

The continued strong rise in US interest rates puts pressure on the performance of companies, especially medium- and small-sized technology companies that always rely on financial support. This could lead to a contraction in the technology sector in the coming period and high-risk emerging companies, especially since Silicon Valley provided complex loan packages that support such companies.

Unfortunately, the situation may lead to a greater slowdown in the world's largest economy. The US economy depends heavily on the technology sector to drive economic growth. If the US Federal Reserve continues to strongly increase interest rates, this will put pressure on the performance of companies and stock markets, ultimately affecting overall economic growth.

The stock market is also facing additional pressures, including the recent reduction in OPEC+ production, which has sparked fears of oil supply shortages and a return of inflation concerns due to the rising prices of oil. These factors continue to put pressure on the performance of companies and consumers.

What to expect from the Dow Jones index?

The Dow Jones index is stabilizing near the 33,400 levels, following a rise of about 150 points. This increase was supported by the performance of several companies within the index, with the technology giant Microsoft leading the way. As well as Tesla and Apple.

Microsoft's stock rose earlier this month after the company announced that it was adding artificial intelligence tools to its popular productivity Office applications. This comes after the company's investments in OpenAI, the company behind the controversial ChatGPT application. In addition, investors' appetite for this type of investment is increasing, which some believe will be the best in the coming period.