Trade Wars And Charles Dow’s Best Saying
The comments below are an edited and abridged synopsis of an article by Nicholas Colas
GE is leaving the Dow after being there for 111 years—longer than any other company. Replacing it is Walgreens Boots Alliance, 4 years old in its current form. At price of around $65, it will have roughly 5x more influence on the Dow than GE ($13).
Why Walgreens and not Amazon or Google? Because Charles Dow’s namesake market didn’t anticipate change. He never envisioned a world where individual stock returns would be so asymmetric that one group (tech) would see share prices rise to hundreds of dollars while the rest of the market saw share prices remain around $50. So he made his index price-weighted.
That was a mistake, because since Google and Amazon trade for $1,168 to $1,735 they will never be part of the Dow. The Dow’s largest weighting is Boeing, with a $340 share price and a 9.8% weighting. Google and/or Amazon would swamp the average.
Moreover, with the rise of indexing, companies have less pressure to split their stocks. Not only is single-stock investing less popular, but also exchange-traded/passive funds like high-priced stocks, since US trading commissions are paid per share. Fewer shares for the same trade size equates to lower costs.
Colas sets out his three observations on what the Dow tells us about equity market sentiment.