While the Dow Jones Industrial Average might be the most well known, it's not the oldest index assembled by Charles Dow. That title goes to the Dow Jones Transportation Index, which also plays an important role in something called the "Dow Theory."
The Dow Jones Transportation Index, or Average, was first put together by Charles H. Dow back in 1884, a good twelve years before the Dow Jones Industrials first appeared. While today's index consists of 20 member companies, the original index was composed of just nine railroads: New York Central, Chicago Milwaukee & St Paul, Chicago & North Western, Delaware Lackawanna & Western, Lake Shore, Louisville & Nashville, Missouri Pacific, Northern Pacific (preferred), and Union Pacific. The index also contained two non-rail companies: Pacific Mail Steamship and Western Union.
As was the case with General Electric and the Industrials, Union Pacific is the only company included in the original Transportation Index that still remains there today. The fact that Charles Dow chose to create an index of transportation companies is a testament to the importance this industry played in shaping the American economy.
The Transportation Index continued to evolve with the advances in technologies. There is a growing importance of companies that not just shipped large quantities of raw materials across the United States, but also delivered packages to homeowners and businesses alike. The member companies, or components, of today's Transportation Index reflect these changes.
As previously mentioned, the Dow Jones Transportation Index includes 20 members or component companies. Each of these companies is assigned a weight that is used along with the stock's price to calculate the index. For example, FedEx has a weight of around 13.10%. That means that approximately 13.10% of the movement in the index can be explained by the stock price of FedEx.
Component weightings become important when a stock is replaced in an index, an event that does not happen frequently. By using a component weight method, this allows for the replacement of a company in the index without the need to restate historical price movements. This feature adds to the overall stability and long-term usefulness of the measure. The stocks included in today's Transportation Index, along with their weights, appear in the following table:
|Company Name||Weighting %|
|Alaska Air Group, Inc.||2.55%|
|American Airlines Group Inc.||0.76%|
|Avis Budget Group, Inc.||1.80%|
|C.H. Robinson Worldwide, Inc.||4.61%|
|Delta Air Lines, Inc.||1.94%|
|Expeditors International of Washington, Inc.||4.61%|
|J.B. Hunt Transport Services, Inc.||6.70%|
|JetBlue Airways Corporation||0.70%|
|Kansas City Southern||9.73%|
|Landstar System, Inc.||6.60%|
|Norfolk Southern Corporation||11.42%|
|Ryder System, Inc.||3.12%|
|Southwest Airlines Co.||2.26%|
|Union Pacific Corporation||9.91%|
|United Airlines Holdings, Inc.||2.11%|
|United Parcel Service, Inc.||8.39%|
The above weightings are as of December 2020. A spreadsheet of this information is also available for download: Dow Jones Transportation Average.
Ever since it was first introduced by Charles Dow; the Industrial Average has been used by various investors to predict movements in the stock market. One of these concepts is called the Dow Theory.
The Dow Theory is supposedly based on the early writings of Charles Dow; however, this is often disputed. Interestingly the first book on the subject appeared in 1902; the same year he died. The most common, and simplified, version of the theory goes something like this:
A rise in the Dow Jones Industrial Average must be "confirmed" by the Dow Jones Transportation Average in order for the rise in the market to be sustainable. This theory is based on the simple relationship that exists between "industrials" that make products and the "transportations" that ship the product. An easy to remember version is that one "makes" and the other "takes."
In reality, the interaction is much more complex than it appears on the surface; however, many investors today still closely monitor the interaction of the Industrials and Transports. You'll often hear talk of the Dow Theory when the Industrials and Transports diverge; a situation that raises a warning flag for stock market investors.
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