Saturday, November 23, 2024
Magnificent Seven member Amazon entered the Dow Jones Industrial Average at the opening bell on Monday, taking the place of Walgreens Boots Alliance, which got the boot. Both moves are, at least partially, in response to a three-for-one stock split from Walmart, of all things. Or, could it be that the creaky, old Dow Jones Industrials, first published on May 26th, 1896, is struggling to remain relevant?
Stocks finished mostly lower on Monday, but the sell-off wasn't too bad and came on so, so volume. Interestingly, the semiconductors were up on the session.
Interest rates were also higher across the board, although again without much conviction.
Just five public companies reported earnings on Monday. All five missed on revenue and three of the five missed on profits. Not a good day on the earnings front.
Mixed news from the economic calendar: building permits for January came in above expectations, but new home sales disappointed. Economists were expecting a 680,000 annualized rate. We got 661,000 instead.
Still, we’re probably back in that phase where bad news is good news if we ever left it. Given the higher-than-expected inflation numbers in recent weeks, the worry on Wall Street is of an economy that is too strong, not too weak.
So, what does the substitution of Amazon for Walgreens in the Dow Jones Industrial Average have to do with the stock split at Walmart?
Well, the Dow has just 30 stocks in it, so if you're going to add one, one has to go. Walgreens has fallen over 60% since it was added to the Dow six years ago. The Dow itself is up almost 70% in that time. Indeed, if Walgreens had just kept up with the other twenty-nine, the Dow would be over 400 points higher than it is today.
Amazon, by contrast, has been one of the fastest-growing companies in the world in the last decade or so, and that has been reflected in its stock price. And it is thought that replacing a mostly brick-and-mortar drug store chain with the largest online retailer in the world, serves to make the Dow more relevant. Maybe.
But what’s the Walmart angle? Well, the Dow Jones Industrial Average is just that. It's an average, not an index. It was developed and popularized during a time before computers. In those days, the average was published once a day after the close of trading. They just added up the prices of all of the stocks in the Average and divided by 30. So, when one of the companies in the Dow splits its stock, the price of that stock drops, and that plays havoc with the calculation. There’s always a “factor” included in the calculation, but the substitution of Amazon and its higher stock price for Walgreens makes that factor less of a contortion.
The S&P 500 is a market-weighted index. The stock price of Walmart is irrelevant. Its market cap of $472 billion or thereabouts is all that matters.
So, will being added to the Dow lift Amazon’s stock price? We're not so sure. Only $87 billion in investor money is indexed to the Dow. Compare that to almost $6 trillion indexes to the S&P. And as we've seen with Walgreens, being a member of the Dow is not a guarantee of a higher stock price.
