With the Dow Jones Industrial Average headed for its biggest shake-up in years, traders are split on the index’s relevance as an indicator of the overall market’s health.
While the Dow is making some ostensibly progressive changes — most notably replacing longtime component Exxon Mobil with cloud computing giant Salesforce — it’s doing so out of necessity.
Apple’s upcoming 4-for-1 stock split will bring the index’s technology exposure to 20.3% from 27.6%, a “significant decline” in a time when the tech trade is booming, one S&P Dow Jones Indices analyst told CNBC.
Adding Salesforce brings that tech exposure back up to roughly 23.1%. The Dow is also replacing Pfizer with Amgen, bringing its health-care exposure to 18.6% from 14.2%, and replacing Raytheon Technologies with Honeywell.
“To be added to the Dow is a historic thing, so, I think it certainly bodes well for the companies and, if nothing else, just investor psychology,” Quint Tatro, chief investment officer at Joule Financial, told CNBC’s “Trading Nation” on Tuesday.
“It sometimes brings great credibility,” he said. “Now, whether that’s a fundamental rationale or bodes well for the stock price is sort of yet to be determined.”
For Todd Gordon, managing director at Ascent Wealth Partners, reading too much into Dow shake-ups would be a mistake.
“It’s fun to talk about and obviously it’s reflective of a market that’s booming and is moving up, but really, I think it’s more a factor of mathematics,” he said in the same “Trading Nation” interview. “They’re just bringing some companies in that are trying to be reflective of the overall economy.”
Putting too much emphasis on the Dow itself wouldn’t be wise considering the importance of another major average, Gordon added.
“You talk to any trader on the Street, any real investor, any institutional money manager, [they’re] always tracking the S&P 500,” he said. “The big futures in Chicago where they trade it on the floor, that’s the heart of the S&P market. The 500 cash stocks, the 500 largest market caps, those are the real drivers of what’s happening here. So, I just don’t want people to get too caught up in what’s happening in the Dow. Realize the S&P is the barometer that you want to be looking at.”
Tatro disagreed with Gordon, saying that “the average investor on Main Street speaks in the Dow.”
“I agree that long term in the averages we always talk about performance in relation to the S&P, but you ask any Main Street investor and they know that that Dow is headed to 30,000 and that’s an important milestone,” Tatro said. “That’s a psychological number. So, they still speak Dow on Main Street for sure.”
The S&P has outperformed the Dow over the last one, two, three, five and 10 years. However, the Dow has outperformed over the last 20, 30 and 40 years. Stocks opened flat Wednesday after another record close for the S&P.
