The Dow Jones Industrial Average (DIA) hit a new nominal high last week, closing above 16,000 for the first time in its century-plus history. The index could have been closer to 17,000 if International Business Machines (IBM) had produced even an average market return thus far in 2013.
IBM held a whopping 11.23% weighting in the index at the beginning of the year. IBM has produced a price return of -6% in 2013, battling Caterpillar (CAT) for worst performance amongst the index's thirty constituents. Given the large weighting of IBM in the Dow, if "Big Blue" had returned the 21% average return of the index, then the Dow Jones Industrial Average would be roughly 3% higher, or 500 points higher than its current level, moving the index closer to 17,000 than 16,000.
I wrote Monday in my article Dow 16,000 Versus Its 2007 Peak while the Dow's adjusted price-weighting and narrow coverage universe are archaic and anachronistic in the days of computerized calculations and alternative weightings, the DJIA has retained its status as a stock market bellwether. Given its long track record, the Dow Jones Industrial Average is a piece of Americana, and Dow 16,000 resonates with the average American. Even if a mere nine stocks account for half its value, this is still the gauge mentioned first on the nightly news and the figure most likely to be at the grasp of the novice investor. If you have looked at Dow 16,000 and made associations with your portfolio, understand that the Dow Jones Industrial Average may not be a good representation for your domestic equity risk. Dow 16,000 could have easily been Dow 16,500 if the index's largest beginning of the year constituent had not turned into an outsized laggard in 2013.