The 142-point plunge by the Dow Jones industrial average on Thursday – to 11,500.73 – delayed the blue-chip benchmark from breaking through the record of 11,722.98 reached Jan. 14, 2000.
But investors may not realize that the Dow likely would have hit an all- time high last week if editors of The Wall Street Journal hadn’t changed the Dow’s mix of companies in April 2004.
In 2004, Eastman Kodak, AT&T and International Paper were dropped from the elite roster of 30 corporate giants. Verizon, Pfizer and insurer American International Group replaced them.
The three companies dropped have performed much better than those added. In fact, disappointing earnings from AIG were a big reason the Dow dropped so much Thursday.
Had no changes been made, the index likely would have already hit a new high, according to an analysis done for The Denver Post by Dow Jones & Co., which publishes The Wall Street Journal.
Had the original companies stayed in, the Dow would have hit 11,822.29 on May 5, breaking the old high, and set another new high Tuesday. There is an asterisk, however: It’s impossible to precisely calculate the performance of the old AT&T in the present day because it merged with SBC in November.
John Prestbo, The Journal’s markets editor, said changes made to the 110-year-old Dow index reflect shifts in the larger economy and the stock market. They aren’t made to boost performance.
“You only have 30 slots, so you have to be finicky,” he said.
International Paper, a basic- materials company, was in a sector whose importance had shrunk. AT&T, before the SBC merger, was removed because it had become a shadow of itself.
“It wasn’t holding up the telecom sector,” he said.
Eastman Kodak was ousted because the Dow had become “too heavy in consumer goods,” Prestbo said.
Why does it matter if the Dow hits a new high?
“Psychologically, it means that investors are whole again,” Prestbo said. “We are approaching the all-time high on more solid ground. We have strong economic growth, and that is carrying us now.”
A rising Dow would indicate support for large-cap U.S. stocks, which smaller companies and foreign stocks have trumped in recent years.
A new high is also important to followers of what is known as “the Dow Theory.”
When the Dow Jones transportation average and the Dow industrials both hit new highs, it reflects strength in the nation’s industrial core, said Phil Dow, director of equity strategy with RBC Dain Rauscher in Minneapolis.
Highs in both averages have historically lent support for a continued advance in stocks.
“Last year, everybody laughed at the Dow. They thought it was dead,” said RBC’s Dow. “It would be very powerful for the Dow to hit a new high.”
Not all market watchers consider it that important, however.
“We caution against reading too much into it, against pulling out the party hats,” said Brad Sorensen, a senior sector analyst with the Schwab Center for Investment Research in Denver.
For one, the 30 companies in the Dow represent only a slice of the total U.S. stock market. Unlike the S&P 500 index, the Dow index is used by few money managers and index-fund investors as a benchmark.
The Dow never fell as far as the S&P 500 and Nasdaq composite during the downturn of 2000 to 2002, so it didn’t have as far to crawl back. That said, many investors may not appreciate how far U.S. stock markets have come back, Sorensen said.
“It gives people some comfort that the Dow is leading the charge,” he said. “It has been a nice, slow, steady run.”
Staff writer Aldo Svaldi can be reached at 303-820-1410 or asvaldi@denverpost.com.
