Sometime this fall, perhaps in the next few weeks, membership in the venerable Dow Jones Industrial Average could change for a second time in 2024.
The changes may have more to do with dumping underperforming stocks than investing in the latest hot stocks. That said, including the latest hot stocks is an incentive, if only to give the 128-year-old Dow more relevance.
The Dow is up 10.3% this year, which sounds good, as are its four record closes in the last five trading days of August.
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But here's the rub: The Standard & Poor's 500 index is up 18.4%, while the Nasdaq Composite index is up 18%. Yet both peaked in mid-June.
Spreads are not new. In 2023, the Dow Jones rose 13.7%, but the S&P 500 rose 24.3%. The Nasdaq rose 43.4% and the Nasdaq-100 rose 53.8%.
The indexes are not equal
There is a reason for the dichotomy. What the Dow produces each day is constructed very differently than what the S&P 500 or the Nasdaq produce. Therefore, the Dow's results should be different.
For years, however, the Dow and S&P 500 have more or less tracked each other. The Nasdaq is different, as it primarily looks for fast-growing companies.
The S&P 500 and Nasdaq indices are weighted by market capitalization, that is, by price multiplied by shares outstanding. Therefore, the more valuable a company's total stock is, the more influence it will have on an index.
The top 10 stocks in the S&P 500 have a combined market capitalization of $16.2 trillion as of August 30, representing 34.2% of the S&P market cap.
How is the Dow different?
The Dow is a price-weighted index. So the higher a stock's price, the more influence it has on the average. Right now, the most expensive stock in the Dow is UnitedHealth Group. (UNH) at $590.20, followed by Goldman Sachs (GS) at $510.25 and Microsoft (MSFT) at $417.14. Apple (APL-American Lead Association) It ranks 11th on the list at $229.
It makes no sense, you protest. Microsoft has a market cap of $3.1 trillion. Apple's market cap is $3.48 trillion. United Health's market cap is only $545 billion, which is certainly not a pittance.
But that's the point.
When Dow founder Charles Dow first published the index, it included only 12 stocks. The index was created by adding up stock prices and dividing by 12. The index has had 30 members since 1928.
Now, it's more complicated. Closing prices are added up and the sum is divided by a divisor that adjusts for splits, share buybacks, and the like. The current divisor is 0.15221633137872. You can find it on the Market Lab page at Barrons.com.
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If you want to know how much of an effect a stock's change in the Dow has on a given day, simply divide the stock's change by the divisor.
On Friday, the Dow Jones closed with an increase of 228 points. amazon (amazon.com) A member of the Dow since Feb. 26, it was the biggest contributor; its 3.7% rise to $178.50 added about 41 points to the Dow. Microsoft, which rose about 1% on the day, added another 26 points.
4 Reasons Why the Dow Is So Different
In 1896 there was no measure to suggest where markets were on any given day. Having that number would help sell the newspaper that partners Charles Dow, Edward Jones and Charles Bergstresser had founded, The Wall Street Journal.
Charles Dow wanted his index to represent industrial America. To accompany his transport index, he focused on railways.
Selection standards were somewhat subjective in 1896. — and still are. A company must be based in the United States and included in the S&P 500 index. It must be demonstrably profitable and provide a signal of where the economy is headed. It must pay dividends. It must be, well, respectable. It can't be a transportation company or a utility company. Each has its own indexes.
When stocks fall, the Dow suffers less. Its members are generally more stable than the stock market as a whole.
The Dow is organized into nine economic sectors: Energy, technology, Consumer Discretionary, Consumer Staples, Financials, Health Care, Communication Services, Materials and Industrials.
technology is the largest sector of the Dow. Its members are Apple, Microsoft Intel and Cisco Systems. (Executive Director of the OECD) IBM (IBM) and Salesforce (Customer Relationship Management) ,
A five-person committee decides membership in the Dow: two from The Wall Street Journal and three from S&P Global. (GSP) that manages the index.
When offered membership, companies rarely say “No.”
Who could be in the crosshairs?
The basic reason for its removal from the Dow is overall performance. Pharmaceutical giant Walgreens Boots Alliance (AMB) It had been experiencing serious problems for several years, which is why amazon replaced it in February.
One company that probably won't leave is Chevron. (CVX) the only energy stock in the Dow. Travelers Companies (TRV) It is the only component of insurance.
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Below are five possible candidates for elimination:
- Intel (INTC) The stock has fallen 56% this year. Its peak closing price of $73.34 came in July 2000. It is struggling to find its place in the world of artificial intelligence.
- Boeing (bachelor of arts) The stock has fallen 33% this year due to management problems and a loss of reputation following two plane crashes and an exploding door on an Alaska Airlines plane. (Mayor) Flight. Airbus is gaining market share.
- Company: Dow Inc. (Lower) The chemicals maker is the smallest stock in the Dow by market capitalization and its share price has stagnated. It is also the only materials stock in the Dow.
- Verizon Communications (VZ) A slow-growing telecommunications company.
- Nike (OF) the sports equipment giant. Shares are down 23% this year.
Five possible candidates to replace him:
- Nvidia (NVDA) currently the third most valuable company in the United States. The chip giant's shares have risen 141% this year.
- Eli Lilly (Lia) the pharmaceutical giant with a market capitalization of nearly $1 trillion would likely have to split its shares.
- T-Mobile (TMUS) A fast-growing mobile communications company. Up 42% since the end of 2022.
- Google Alphabet-Father (GOOGL) either (GOOGL) . The search giant.
- Costco Wholesale (COST) The wholesale retail giant, a fierce competitor of Walmart. Up 44% in 2023, shares up 35% this year. It would probably have to split its stock.
The easiest solution is to replace Nvidia or Alphabet with Intel.
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