Here’s how we got there.

The Dow Jones Industrial Average made history last Thursday by surpassing the 40,000 mark for the first time ever. It topped 40,000 around 10:30 a.m. ET, but closed just below that at 39,869 on Thursday.

On Friday, the Dow closed just above 40,000 and remained above this key level in Monday morning trading. Of course, it remains to be seen whether the index will be able to maintain the 40,000 level in the coming days.

Still, 40,000 is an important milestone for the Dow Jones Industrial Average, which has been the market’s most cited barometer for more than 100 years. Here’s how we got to that level and why it matters.

Why the Dow is important

The Dow Jones Industrial Average may not be the best indicator of market movements. Perhaps the S&P 500 or Russell 1000.

The Dow contains only 30 stocks selected by a committee based on various criteria. Stocks in the Dow are reviewed regularly to ensure that all stocks effectively meet the standards, and if some do not, they are replaced. The final change came earlier this year with the addition of Amazon (NASDAQ:AMZN) and the launch of Walgreens Boots Alliance (NASDAQ:WBA).

Although the companies included in the Dow aren’t necessarily the largest, it does include three of the largest companies in the United States: Amazon, Apple (NASDAQ:AAPL), and Microsoft (NASDAQ:MSFT). But what the committee is trying to do is select the largest and most influential stocks across various sectors and industries.

As a result, the index includes stocks like Amgen (NASDAQ:AMGN), which represents healthcare. Travelers (NYSE:TRV), which represents insurance, Walmart (NYSE:WMT), which represents retail; McDonald’s (NYSE:MCD) represents food. In this sense, the Dow Jones Industrial Average is often considered a better indicator of economic conditions than the stock market.

The Dow is also the oldest index, having existed since 1896. It is also the most cited stock index by the news media and the general public. Probably because it is the oldest and best known.

The Dow’s returns broadly match those of the S&P 500 over time. Going back to 1990 and looking at a 34-year snapshot, the Dow returns an average of 8.1% per year and the S&P 500 returns an average of 8.3% per year.

However, the Dow’s annual returns are less volatile than the S&P 500’s returns. Let’s take recent history as an example. In 2023, when the S&P 500 was up 24%, the Dow returned just 13%. On the other hand, in 2022, when the S&P 500 fell 19%, the Dow fell only 8%.

This pattern is traced throughout the history of both indices. One reason is that the Dow includes large, blue chip, and stable value stocks that are less volatile. Like the S&P 500, the Dow is weighted by price rather than market capitalization, so large-cap stocks do not dominate performance as much.

Dow Jones Industrial Average

As previously mentioned, the Dow was launched in 1896 and did not hit 1,000 until November 14, 1972. One of the reasons it took me so long to get to this core level is because of math. You make bigger profits when the numbers are low than when they are high. When the Dow is at 100, a 20% rise is only 20 points, whereas when the Dow is at 5,000, a 20% rise is 1,000 points, so the higher the index, the faster the rise.

It took much less time to reach 2,000. It took only 15 years, as it was reached on January 8, 1987. Things started moving faster when the Dow hit 10,000 just 12 years later on March 29, 1999. Technology and the dot-com boom.

Getting to the next 10,000 took some time, due to disruptions caused by the dot-com crash of 2000-2001 and the global financial crisis of 2008-2009. The Dow reached 20,000 on January 25, 2017, about eight years after hitting 10,000.

Over the next seven years, the index size will double to 40,000. It reached 30,000 on November 24, 2020, and broke the plateau by reaching 40,000 on May 16, 2024.

Going forward, history suggests the Dow Jones Industrial Average will reach 50,000 sometime around 2027, if not sooner.