Last week, Dow Jones, the keeper of the popular stock market indices Dow Jones Industrials, Transportation and Utilities, had a major shake up in their most widely watched Industrial Average. Being thrown out are Alcoa, Bank of America and Hewlett Packard. On the other hand, Goldman Sachs, Nike and Visa are coming on board.
On the surface, this makes all the sense in the world as Alcoa has been a stodgy old aluminum company while B of A and Hewlett are kind of boring and old fashioned. Oh yeah, and all three have cheap share prices. Let me repeat that in a different way; all three are lower priced stocks. Unlike almost every other popular stock market index, Dow Jones weights each company based on price. So the more expensive the stock price, the more impact on the index. The three downtrodden now account for roughly 2.5% of the index.
With GS, NKE and V trading around $168, $68 and $190 respectively, the divisor for prices move in the Dow just changed significantly. That means the index should have bigger price moves simply because the components have higher share prices. Think of it this way, is it easier for an $8 stock like Alcoa to move $1 or $190 stock like Visa? Of course, it’s Visa by a wide margin.
Now comes the fun part. On the surface, you should conclude that Dow Jones is throwing out AA, BAC and HPQ because they no longer represent our economy as the index intends to and by replacing the with GS, NKE and V, the index is more representative of the economy. I cannot argue with that conclusion.
HOWEVER, I do find it “curious” when Dow Jones reconstitutes the index every few years that we usually see higher priced shares coming in to make it much easier to move the index. Given the Dow’s popularity as the bellwether for what stock market is doing, this change adds some strong juice to get the Dow moving. Wouldn’t it be amazing if this change helped the Dow exceed 16,000 and beyond next year?
