Market Overview
Dow 30 approaches 130
In this newsletter, we generally rely on the Standard & Poor’s 500 as a proxy for the broader American stock market. Further, we adjust the month-over-month change in the S&P 500 to assume that the holders of these stocks are passive investors who reinvest their dividends automatically.
But that’s not the headline we’re accustomed to seeing elsewhere, is it? Everyone wants to know about “the Dow”. The Dow Jones Industrial Average is a price-weighted index of 30 prominent or “blue chip” stocks and, as we discussed in this month’s feature article, there’s something unique about mega-caps.
What’s interesting about the Dow is that, over its 125 years, it has changed through every generation. The Dow today is not the index it was at the turn of the millennium, and that Dow had little in common with the Leave it to Beaver-era Dow, which in turn would have been unrecognizable to someone who was following it during the Roaring ‘20s.
The historic view
Today, technology is clearly the driver of what constitutes a blue-chip stock. Six tech plays – Apple, Cisco Systems, IBM, Intel, Microsoft and Salesforce – are components, alongside five financial services firms. Three pharmas, three retailers, a couple food purveyors and a couple conglomerates are also on the list, which is rounded out by representatives of aerospace, apparel, entertainment, chemicals, construction, health care, petroleum and telecom.
In 2020 alone, though, there were three swaps as Amgen, Honeywell and Salesforce replaced ExxonMobil, Pfizer and Raytheon.
That was shortly after the last original member of the club was kicked out. General Electric, which was part of the initial class of 1896, was replaced by Walgreens Boots Alliance in 2018. By the way, AT&T stayed on the Dow for almost 33 years after it was carved up by the Federal Trade Commission, but was eventually replaced by Apple in 2015.
When Microsoft and Intel replaced Goodyear Tire and Sears Roebuck in 1999, they earned the distinction of being the first two Nasdaq-traded stocks to be elevated to the Dow. Prior to that, it was practically unthinkable to have a Dow 30 component that didn’t trade on the New York Stock Exchange. At the time, they joined such smokestack companies as Alcoa, Eastman Kodak, General Motors, 3M and Philip Morris. (Is Philip Morris really “smokestack”? Figuratively, at least.)
At the end of the 1950s, the lineup was almost completely foreign to today’s Dow: Allied Chemical, Anaconda Copper Mining, Bethlehem Steel, Union Carbide, Westinghouse Electric, F.W. Woolworth. Still, AT&T was on the list, and current Dow component Verizon started out as a Baby Bell. And duPont later merged with Dow Chemical (no relation to Dow Jones), which is also a blue chip today. Interestingly, Standard Oil of Ohio and Standard Oil of California – both born of antitrust carve-ups – were among the 30 in 1959.
The lineup that saw the dawn of the Great Depression in 1929 included American Sugar Refining, Curtis-Wright, Mack Trucks, Nash Motors, RCA and Union Carbide.
Even this was a departure from the starting lineup, which included American Cotton Oil, American Tobacco, Chicago Gas Light and Coke, Distilling & Cattle Feeding, National Lead and the preferred stock of U.S. Leather. In 1896, there were only 12 stocks in the average. It was expanded to 20 in 1916 and then to 30 in 1928.
What’s to come
The Dow is probably going to stick to 30 names for the foreseeable future. Up until 1957, when the S&P 500 launched, it endeavored to be a stand-in for the broader market – a role that the S&P has performed better ever since. So it’s free to be the exclusive club it had evolved into.
Still, for a company trying to make the cut, there’s more at stake here than just cache. The mere act of becoming a component of any index means that every fund manager chartered to emulate that index needs to buy its shares, so the price generally gets an immediate bump up. So let’s take a moment to speculate about who the next Dow 30 members will be.
To start with, it seems odd that there isn’t a single automaker on the list. The S&P currently has three: GM, which was once a Dow component, Ford, which for some reason never was, and everybody’s darling Tesla. We don’t see how Tesla doesn’t at some point make the cut.
Also, considering it’s the Dow Jones Industrial Average, it’s telling that it features so few industrials: no airlines, no professional services, no delivery services. Right now, the largest U.S. airline by market cap is Southwest but, at $30.4 billion, that’s a little light for the Dow. Leading advisory firms like Accenture and Capgemini are – and this is something that maybe we ought to be discussing – domiciled in other countries. Still, what’s wrong with selecting UPS as a Dow component?
But if there’s one thing America has more of than just about anyone, it’s prime real estate. We don’t know why the Dow’s membership committee – or whoever’s in charge – overlooks American Tower, but this real estate investment trust has a fascinating niche. At first we thought that it owned office towers or apartment towers, but we were wrong. It owns cell towers – more than 170,000 of them around the world.
Whoever joins the Dow 30 over the next five years – in time for its 130th anniversary – will very likely make its investors very happy. But any forward-looking statements we just made are entirely speculation. This might be a good topic, though, for you to have with a financial professional.
