The Dow-Jones Industrials: Out With The Old....

The Wall Street Journal reported this week on the change in complexion of its major market index, the Dow-Jones 30 Industrials.

Out went Honeywell and Altria, in came BofA and Chevron.

I suppose there are various reasons for the changes. One is that Altria is effectively going away shortly, as the company's offshore tobacco businesses are being split from the old Phillip Morris.

As for Honeywell's ouster, apparently the folks at Dow-Jones feel that oil now represents a greater component of US economic activity than the diversified, high-value-added manufacturing and distribution of engineered material and systems produced by Honeywell.

Curiously, BofA was added, again, on the pretext that financial services is now underrepresented in the 30 company group.

Out of curiosity, I produced charts of all four companies on Yahoo, over 2-year and 'maximum' year timeframes.

The nearby two-year chart shows all four companies moving more or less in a band together until early last year. Then things got interesting.

Honeywell, one of the exiting companies, spurted ahead of two of the others, with Chevron slightly outperforming it, but with a similar pattern.

Altria, also exiting, also outperformed BofA, the worst of the lot. Of course, as the year wore on, and Ken Lewis had "about as much fun as (he could) take" in investment banking, BofA's performance slid sharply. In fact, so sharply that it nearly ended the two years back where it began.

The DJIA itself actually underperforms all the firms save BofA.

Turning to a much longer-term view of the four companies' stock prices, we see that all of them, except Altria, had remarkably similar paths for the past 38 years. There was a bit of untracking in the late '80s to mid '90s, and, as I noted above, in the last few years. And Honeywell declined noticeably from the path that Chevron and BofA shared for the early years of this decade.

Amazingly, the outperformer of the bunch has been the tobacco-and-sometime-packaged-goods giant, Altria, once a/k/a Phillip Morris..

What does all this mean for the Dow? I guess the rough parity of the three non-tobacco firms means you might expect similar Dow-Jones performance going forward. Maybe there's even a sort of central-tendency play going on, wherein the outliers over time, Honeywell and Altria, are dropped, in favor of two more attenuated stocks, BofA and Chevron.

Since the DJIA, over this long timeframe, nests right in among BofA and Chevron, this would seem to be true, even if it's not actually why Dow-Jones made these specific replacements.

Being focused more on the S&P, I really don't pay any serious attention to the Dow. If anything, this sort of shuffling merely points out how sensitive to membership is any market index composed of only 30 companies. Did the staff at Dow-Jones have to work exhaustively to choose a mix of outgoing and incoming companies, such that their effects upon at least the recent past of the Dow's performance would be minimal?

Choosing a bank and an oil company in an era of huge write-offs among commercial banks, including BofA, and dwindling opportunities for oil reserves acquisition by US majors worldwide, poses an intriguing question about the real reasons behind these choices.

As a few pundits opined, you can bet the folks at Dow-Jones want the index to do better, not worse, over time. Thus, they must be placing an implicit "call" on BofA and Chevron and, by extension, financials and oil in the US economy. And an implicit "put" on tobacco and diversified manufacturing onshore.

That's not a view I would have expected them to take, all other things equal. It should be interesting to see what sort of comments are made on these changes in the months and years ahead.