Last Wednesday, the Dow Jones industrial average finally booted General Electric, a company that had been one of its original 12 components in 1896.
The famed light bulb maker was replaced with Walgreens Boot Alliance, which owns your local Walgreens/Duane Reade pharmacy. Walgreens stock plummeted 9.5 percent on its second day in the index.
Also on Thursday, Amazon (which is not in the Dow) announced the acquisition of online pharmacy PillPack, reportedly outbidding Walmart in the process.
The stodgy old “blue chip” Dow has contained only 30 stocks since 1928. And it’s about time the Dow expanded. The fact is, an index of 30 companies doesn’t represent the stock market very well in 2018. There should be 20 more.
The Dow needs to play statistical catch-up to today’s marketplace. Quantitatively, as I said, 30 stocks aren’t enough. But even qualitatively, who the heck thought a $59 billion market cap pharmacy/toothpaste store was the right addition?
I mean, come on.
Amazon’s $860 billion market cap wasn’t more economically representative than Walgreens’? Or Google’s $770 billion, or Facebook’s $570 billion?
Before all the geniuses in charge of the Dow Jones industrial index get their knickers into a twist, they need to understand that I spent many years after grad school constructing indexes for hedge funds. So I know how to build indexes that are statistically representative of the underlying data, as well as being able to mathematically measure performance properly.
The Dow needs to use equal-percentage movement weighting and discontinue its old, statistically inaccurate price weighting, which favors higher-priced stocks.
And, obviously, expand to include things like social media and internet companies.
These could make it a true indicator of stock market health.