The stock market has been doing fantastic this year, but exactly how great depends on your answer for what is the “market.”
Advisors and financial gurus typically refer to the S&P 500 to describe U.S. stock performance. By that measure, the market is up 15% this year. Gains stem from investors’ enthusiasm for technology stocks. Giants like
Nvidia
,
and
have each crossed $3 trillion in value this year, taking the S&P 500 along for the ride.
But maybe you cite the Dow Jones Industrial Average, the oldest and best known barometer of the U.S. economy and market. By that measure, the market has been nothing but ordinary, the index is up a little under 3% this year.
That’s nothing to write home about. If you bought a U.S. government debt this year, you could have earned between 4% to 5%. There are high-yield savings account that still offer a generous return of 5% as well.
The S&P 500 clearly shows “we are in a rip roaring bull market,” wrote Matthew Tuttle, CEO of investment firm Tuttle Capital Management. “If you look at the Dow” then it looks completely different.
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The Dow is price-weighted, which means stocks with higher prices have a greater influence on the index.
Dow’s priciest stock at $481, is down 8.6% this year. Intel, the cheapest stock, is down nearly 40%. Yet UnitedHealth’s price decline has hit the Dow by more than twice as much as Intel’s.
The Dow also doesn’t care about market value. A company that’s more valuable but has cheaper stock—think
Amazon
,
a near $ 2 trillion dollar business with stock at $183—makes less of an impact than UnitedHealth. By contrast, the S&P 500 and the Nasdaq Composite are market-cap weighted—the bigger companies have a bigger effect on performance of the index.
The Dow’s performance raises a bigger question: Do its 30 components accurately make it the market’s blue-chip benchmark, encapsulating both the U.S. economy and the stock market?
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There have been roughly 119 replacements to Dow’s components since its inception more than a century ago. Selections aren’t governed by a strict set of rules, but are focused on a history of growth, a company’s reputation, investor interest, and sector representation, S&P Global Dow Jones Indices, which manages the Dow, says.
Barron’s tried to build a better Dow, one with more dominant players that would be better suited for the index.
was an obvious replacement candidate. The embattled aviation giant has taken many hits to its reputation. The emergency door blowout earlier this year, following past manufacturing problems, demonstrated that its problems were larger. Boeing stock, down 33% this year, has exerted the most downward pressure on the Dow.
Substitute it with defense contractor
The company, which makes combat vehicles, nuclear-powered submarines and more, is better known within aviation for quality control and its 15% year to date gain, points to general investor interest. General Dynamics was a Barron’s stock pick in September.
Among technology companies, the Dow could do with Google-parent
Alphabet
,
one of the artificial intelligence torchbearers. Alphabet’s stock split in 2022 made the company viable for entry. Shares used to trade at 2,255.34, which would have significantly skewed the Dow. It’s now at $175 and can bump out
Salesforce replaced
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in 2020. And since then through month-end May, the stock has depressed the Dow by about 800 points, Barron’s had estimated. The stock’s performance this year, down 12%, has lagged far behind the broader tech index, Nasdaq 100, which is up 18%.
Network-gear vendor
’ representation of the tech market can also be questioned. The company, founded in 1984, had its days in the sun; it was the most valuable company on Earth back in 2000. Now its market cap of under $200 billion is no match to the tech giants. The stock is down 9% this year.
A relatively younger
is our suggestion. It has been a clear beneficiary of the AI excitement, and generates a large chunk of its revenue from Microsoft and Meta Platforms, which are big AI spenders themselves. The stock is up 44.5% this year.
Switch Intel with
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It has been a terrible year for Intel shareholders. The stock is down 39% this year, and Intel offered disappointing guidance recently. The stock, though, may eventually rebound if AI PC shipments pick up, but the Street is far more optimistic about the future of Micron Technology. Shares are up 80% this year.
This theoretical Dow could have offered investors a 9.5% return this year through Monday’s close, Barron’s has calculated. It’s still below the S&P 500’s gains, but it is at least a decent and respectable showing with components that better reflect the sectors and Dow’s imperative.
S&P Dow Jones Indices said it doesn’t comment on potential index changes. Constituents, according to their methodology, are replaced on an as-needed basis instead of a periodic reconstitution.
Write to Karishma Vanjani at karishma.vanjani@dowjones.com.
