The stewards of the Dow Jones Industrial Average are very good at making sure the changes they make to the stock market’s venerable barometer are seamless for investors, but no one is perfect.
How the 128-year-old index DJIA is constructed is a closely guarded secret by S&P Dow Jones Indices. However, changes may be revealed, such as the influence each stock has.
There is also the problem of the Dow jinx, where new members tend to underperform those they replace.
Dow differs from other market trackers in that prices are determined by changes in the dollar amount of component stocks. Therefore, stocks with high stock prices have a greater impact on the price of the index, rather than companies with large market capitalizations, such as those included in the S&P 500 Index SPX or the Nasdaq Composite Index COMP.
Rather than weighting based on market capitalization, there is a “divisor,” which is a Dow stock’s price movement divided by a number that determines the impact of that stock’s price movement on the Dow.
As of Friday, that divisor was 0.15172752595384. This means that for every $1 change in any Dow stock, the Dow Jones Industrial Average changes by 6.59 points.
Monday at Walmart Inc.
WMT
A stock split reduces the price by two-thirds. And as of Friday’s close, the price of Amazon.com Inc.’s stock had risen.
AMZN
It was about eight times the sale price of Walgreens Boots Alliance.
W.B.A.
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Also read: Why you can expect the Dow to change in February
These changes slightly increase the divisor to 0.15265312230608. This means that price changes in all other Dow stocks have slightly less impact on the Dow price. For every dollar change, the Dow moves 6.55 points.
As of Monday’s open, Amazon will be the third-largest company in the Dow Jones Industrial Average by market capitalization, but 17th out of 30 companies by value. A 1% change in Amazon’s stock price moves the Dow Jones Industrial Average by 11.5 points. However, shares of UnitedHealth Group, the highest-priced stock on the Dow Jones Industrial Average, rose 1%.
UNH
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The company, which owns about a quarter of Amazon’s market capitalization, would move the Dow Jones Industrial Average by about 35.5 points.
Dow officials said the idea behind Monday’s changes was to increase exposure to consumer retail and other business areas. In effect, managers traded stocks that were negatively correlated to the market for stocks that were relatively highly correlated.
Over the past two years, the correlation between Walgreens and the Dow Jones Industrial Average has been -0.45, and the correlation between Walgreens and the S&P 500 has been -0.51.
Meanwhile, the correlation between Amazon stock and the Dow Jones Industrial Average was 0.60, and the correlation with the S&P 500 was 0.82.
S&P Dow Jones Indices also modified the Dow Jones Transportation Average DJT by adding shares of Uber Technologies.
Uber
While removing JetBlue Airlines Corp. stock.
JBLU
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Given that Uber stock’s closing price on Friday was about 12 times that of JetBlue stock, the divisor for Dow Transportation stock rose from 0.1627986 to about 0.1673077.
Keep in mind that Dowkeeper is not trying to pick winners. Their mission is to match the market. And they have performed very well over a long period of time. The correlation between the Dow and the S&P 500 has been 0.93 over the past two years and 0.99 over the past 10 years.
But for some reason, a feature of the Dow movement is that stocks that enter often outperform stocks that exit in the short term.
Some people may not think that Walgreens’ stock price will surpass that of Amazon, one of the so-called Magnificent Seven group of tech stocks, but it certainly will when Apple’s stock price rises. Many people would have thought the same thing.
AAPL
Replaced AT&T Inc. stock
T
.
In the year before Apple joined the Dow Jones Industrial Average on March 19, 2015, the technology giant’s stock soared 71%, while telecommunications giant AT&T’s stock rose just 3.4%.
A year after the stock exchange, Apple’s stock price fell about 18%, while AT&T’s stock price rose 16%.
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Meanwhile, Amazon’s stock has soared about 83% over the past year, while Walgreen’s has fallen 40%.
Also read: The analyst who coined the nickname for Big Tech describes the comfort of the “Magnificent Seven.” Here’s why:
Here is the performance of the stocks that joined the Dow on August 31, 2020, and the stocks that replaced them, the year after the last changes were made.
- Salesforce Co., Ltd. stock
CRM
The year after it joined the Dow, it fell 2.2%, but it was replaced by Exxon Mobil.
XOM
,
It soared 34%. - Amgen stock
AMGN
Pfizer’s stock price has fallen 11% in the year since its entry.
PFE
Since launch, it has grown 28% annually.
- But as Honeywell International’s stock price shows, this jinx wasn’t always the case.
Hong
RTX Corp.’s stock price rose 38% in the year after it joined the Dow.
RTX
It rose 36% in the year following the withdrawal.
