Market changes for future growth

Posted 6/17/09

There were two significant changes to the stocks listed on the Dow Jones Industrial Average recently. Historically this benchmark of just 30 …

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Market changes for future growth


There were two significant changes to the stocks listed on the Dow Jones Industrial Average recently. Historically this benchmark of just 30 industrial stocks was designed to measure the stock market in general. Investors could monitor the DOW each day and get a good indication of how the market was performing. These changes will go down in history for several reasons.

General Motors declared bankruptcy and was removed from the DJIA and replaced with Cisco. Therefore we moved away from a manufacturing company in favor of a technology company. This could be an indication the make-up of the economy is changing and we are bringing the indexes back in line.

The second change was removing CitiGroup and replacing with Traveler’s Insurance. While these both could be considered financial companies, CitiGroup was removed due to substantial government intervention. The consideration here was that the company is largely controlled by the government which could reduce the free-market trade ability designed for major corporations making up the indexes.

Investors have argued for years that the DJIA was not a good indicator of the economy in general since we were no longer only an industrialized nation. However, long term the 30 stocks on the DOW have matched the performance of the much larger S&P 500 index 95 percent of the time. Therefore it is important to see the new changes continue to keep the DOW a good, current benchmark.

One main difference in the two blue chip indexes is that the DJIA is a price-weighted benchmark, meaning companies carry larger representation based on the price of the stock. Therefore if IBM is considered an expensive stock and has a good day, it could move the DJIA substantially all by itself. In theory, one company would not be having such a good day if the economy in general were bad, however it can happen and that is where some of the daily volatility comes from.

The Standard & Poor’s 500 (S&P 500) on the other hand is market value weighted; that is, movements in the prices of stocks with higher market capitalizations (the share price times the number of shares outstanding) have a greater effect on the index than companies with smaller market caps. This is a broader representation with another 470 stocks in the benchmark. The index is now float weighted. That is, Standard & Poor's now calculates the market caps relevant to the index using only the number of shares available for public trading.

The changes made are a good indication the indexes are monitored for their relevancy to the economy in general. It will be interesting to see if more companies are eliminated due to more government intervention or more recession issues. Some investors follow the benchmarks to help determine market trends or direction. However you cannot actually invest in an index, it is merely an indication of how the major stocks are performing.

Patricia Kummer has been an independent certified financial planner for 22 years and is president of Kummer Financial Strategies Inc. at 8871 Ridgeline Blvd. in Highlands Ranch. She is a financial consultant offering securities through SagePoint Financial Inc., member FINRA, SIPC, and investment advisory services through KFS Inc., a registered investment advisor, not affiliated with SagePoint Financial Inc. She welcomes your questions at


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