Though its influence has finally waned somewhat in recent years, for over a century, the Dow Jones Industrial Average has been, and, for many, remains, synonymous with the stock market. News reports continue to proclaim “the market” is up or down, referring to this index.
Yet, the index consists of a mere 30 stocks, not particularly representative of the market, and is price-weighted- a nonsensical choice inferior to market-capitalization-weighted indexes such as the S&P 500, which, with 500 stocks is much more representative of the market as a whole.
The fine folks at Bespoke Investment Group often have fascinating insights. They recently published a fascinating article, showing what would have happened if Apple(AAPL) had been added to the index in June 2009 rather than Cisco(CSCO). This one single swap would have left the index 14% higher today, at an all time high. The fact that the selection of a single stock can lead to such a wide divergence in the index over such a short period of time should give anyone pause before paying any heed to this index.
The numbers, from Bespoke:
Even though AAPL was not chosen to replace GM, it is always fun to see what might have been. To that end, we have recalculated the performance of the DJIA to reflect how it would have done if AAPL was added to the DJIA instead of CSCO. The chart below shows the current DJIA (blue line) compared to the ‘Apple’ DJIA (red line). Currently, the DJIA is trading at a level of roughly 12,865, which is about 12.1% off its all-time high of 14,198.10 from October 2007. If AAPL was in the DJIA, though, the index would not only be significantly higher (14%), but it would also be trading at an all-time high of 14,636. Granted, you cannot go back and change the past, but we wonder if investor sentiment would be more positive if the DJIA was trading at record highs?
Disclosure: The author holds no position in any stock mentioned