The Dow at 20,000: A Context Problem

On January 25th, the Dow Jones Industrial Average (DJIA) closed above 20,000 points for the first time in the index’s history.

The following morning, the Wall Street Journal celebrated the milestone on its front page.


The page is beautiful. The articles fit perfectly inside a dramatic chart.

But does the story that the chart tells paint an acurate picture of how the Dow has performed over time?

At first glance, it appears that the last 20 years were the most important, most volatile, and most profitble years for the index.

But were they really?

It depends how we define importantvolatile, and profitable. Do we care more about the raw point values for the DJIA or do we care more about the percentage change in the index? Do we care about how well the Dow represents the overall U.S. economy at any given point in time? Does who owns shares in the companies within the index at each point in time matter? What about the way stocks were traded in the 1903 versus 2013? Or 2017?

Addressing the first question alone, we see that a graphical representation of the index over time produces two significantly different stories of the Dow’s performance depending on which scale we use.

DJIA – Arithmetic Scale


DJIA – Log Scale66efd72d8fb865e3c9d7f0fdfb63c30e

If we care about percent change in the Dow, using the chart with the log scale is far more important. Using this chart we see that the 1920s provided a far larger gain than the one we’ve seen since the most recent financial crisis. Similiarly, we see that the stock market crash that rang in the Great Depression was far larger than the crash associated with the last recession we experienced.

Yes, the Dow has reached incredible levels. For those who have enjoyed the ride on its way upwards, they deserve to celebrate. However, it’s just a number.

Perhaps most importantly, for those who have been left out of the market’s most recent rally—not because they weren’t smart, but simply because they lacked any money to invest—this is nothing to celebrate.

Perhaps NPR’s Planet Money best contextualizes the Dow at 20,000:

“Don’t believe the hype.”

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