Dow Jones index fine-tuned for finance, energy
Effective Feb. 19, the world's best-known stock index, made up of 30 blue chips, will sport a new look. In what amounts to a Botox moment for investors, the keepers of the Dow are booting cigarette maker Altria and industrial firm Honeywell. Joining the Dow is Bank of America, the nation's biggest bank by deposits, and Chevron, a key energy player.
The changes, announced by Dow Jones, are designed to make the Dow better reflect a global economy increasingly driven by finance and energy. A review of the index found that the finance industry was "under-represented" despite the recent turbulence. They also recognized the oil and gas industry's "growing importance to the world economy," says Marcus Brauchli, managing editor of The Wall Street Journal and the person who oversees the index.
Even though the Dow's energy weighting will nearly double to 10.8 percent, and its financial stake will edge up to 13.9 percent, both sectors still have smaller weightings than the broader market, says Bespoke Investment Group.
Richard Moroney, editor of Dow Theory Forecasts, says leading growth names, such as Apple and Google, were passed over: "They could have gone in a different direction." He says investors shouldn't expect a big boost for the Dow.
Altria was deemed expendable because spinoffs of Kraft Foods and Phillip Morris International left it a narrowly focused domestic tobacco company. Honeywell was dropped because the role of industrial companies relative to the stock market has been shrinking.
The moves mark the Dow's first major changes since April 2004.
Stocks added to the Dow since late 1999 have not fared well. In November 1999, chipmaker Intel and software giant Microsoft were the first "New Economy" Nasdaq stocks added to the smokestack Dow. Since then, Microsoft's shares are down almost 39 percent, and Intel's 46 percent, versus a 15 percent gain for the Dow.
Similarly, two of the three stocks added to the Dow in April 2004 have also dropped in value. Shares of drugmaker Pfizer have fallen 38 percent, and insurer AIG has plunged 41 percent. AIG shares fell 12 percent Monday to $44.74 after its auditor questioned how it was valuing securities backed by mortgages.
While the Dow's relevance is often downplayed by Wall Street, which views its 30 stocks as too small a sample to gauge the market's health, it still packs power. "Everyone, even pros, who hear the Dow is down 300 points reacts to it," says money manager Neil Hennessy. "The Dow is mainstream."
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