If you put any weight on psychological thresholds, you are likely awaiting the day when the Dow Jones industrial average crosses the 10,000-point mark. As of Wednesday afternoon, the venerable blue-chip index was just 235 points shy of the mark. Another 2.4 per cent jump will put it there.
But here’s an interesting point: According to Jon Ogg, a blogger at 24/7 Wall Street, the Dow would already be at 10,000 if American International Group Inc. (AIG) and Citigroup Inc. (C) had been allowed to stay in the index – rather than getting the boot over the past year as their share prices shrivelled.
“Changing index components can bite both ways,” Mr. Ogg said.
To be fair, AIG has fallen 57.5 per cent since it was shown the door last September, vastly underperforming incoming Kraft Foods Inc (KFT). But at the Dow, a high share price gives a stock bigger clout in the index, and AIG would have more clout today because a 20-for-1 stock consolidation boosted its share price to about $41 (U.S.). Also helping the stock is the fact that the share price has surged 474 per cent since early March.
This only highlights the impression that the Dow is a bit odd, as we’ve pointed out before in this space. Besides the big-share-price, big-clout phenomenon, the 30 stocks in the index are selected more on personal whim than impersonal criteria.
This has opened the index to some embarrassment over the years, like when it added Microsoft Corp. (MSFT) during the dying days of the technology bubble or when it kicked out Chevron Corp. (CVX) when oil prices were low (the oil producer has since been reinstated, but only after oil recovered).
As well, the index is looking increasingly irrelevant from an investor’s perspective. You would think that a stock would bounce higher after being added to the Dow, thanks to higher visibility and the need among fund managers to own Dow components.
Not so. BusinessWeek, quoting a study by Messod Daniel Beneish of Indiana University’s Department of Accounting and John Gardner of King’s College London, recently pointed out that there is very little impact among stocks added to the Dow or removed from it.
That’s because very little money actually tracks the Dow. The SPDR Trust (SPY) exchange-traded fund that tracks the S&P 500 has $68-billion (U.S.) of assets, versus the $8-billion that tracks the Dow through the DIAMONDS Trust ETF (DIA).
Call these hollow criticisms if you like, but keep in mind that the Dow has been underperforming the broader S&P 500 recently. Over the past 12 months and 5-year periods, the Dow has outperformed on a total return basis, mostly because it tends to have stocks that pay out more general dividends.
But this year, the Dow is up 11.5 per cent versus the 18.1 per cent gain for the S&P 500 – a 6.6 percentage-point difference. Put another way, the S&P 500 has outperformed the Dow by a remarkable 57 per cent this year.
If or when the Dow does hit the 10,000-mark, you’ll certainly see bold headlines and discussions about the psychological impact of crossing through this threshold. But as psychological thresholds go, the S&P 500 passing the 1,000-point mark – mission already accomplished – was more important.
