But, of late, there have been questions about the Dow's relevance. The size, industrial and financial focus of the index's composition rendered it a tad too old school for the digital economy. Too much brawn, not enough brains. The Standard & Poors 500 began to surpass the far more limited number of companies in the Dow as the more reliable index, reflective of the myriad changes in the evolving economy.
So, when the news that stalwarts of the old economy like Alcoa and Bank of America, and even of the new-old like HP (remember when that morass was considered an emblem of all that was commendable and worthy?) were replaced on the Dow index by Goldman Sachs, Visa and Nike, the significance of the symbolism could not be ignored.
To begin with, news reports about the change were split: some focused on the companies being replaced, others on the ones' coming in. Some of that might have reflected politesse - not drawing attention to the misfortunes of others - but some might have simply been a self-perceived world view: let's look to the future not to the past.
But it is hard to look at Goldman, Visa and Nike and not wonder whether, however accurate they might be as avatars of this civilization, they represent the best the US can do: An investment bank notable for selfishness so all-encompassing that they admittedly cheat their own customers? A credit card company which relentlessly flogs excess consumer debt? A marketer of me-generation(s) leisure time athletic equipment, known for its abuse of the foreign workers who make their products (though now, admittedly, far more responsible)?
Not that B of A with its scandalously irresponsible mortgage policies, HP with its chronic governance failures and Alcoa, with its days-of-yore industrial focus, are any better. If, however, we are looking for truly powerful symbols of future growth, it is hard to glance at Goldman, Visa and Nike without questioning the potential of the economy they allegedly embody. Financial manipulation, debt and leisure? Really? That's it, the best America can do? Or is it simply a bitterly truthful realization of what the US has come to and in that unflattering reflection, perhaps, an inspiration to do better? JL
William Alden reports in DealBook:
The Dow Jones industrial average is shaking up its roster.
Alcoa, Bank of America and Hewlett-Packard — three stalwarts of corporate America that have fallen out of favor lately with investors — will be removed from the Dow, to be replaced by Goldman Sachs, Visa and Nike, the parent company of the index said on Tuesday.
The change, which will go into effect after the close of trading on Sept. 20, is the largest revision to the index since April 2004, when AT&T, Eastman Kodak and International Paper were dropped. It reflects the changing landscape on Wall Street and in the broader economy.
The decision to remove the three companies was prompted by their sagging stock prices and the index committee’s desire to diversify the mix of companies represented, according to S.&.P. Dow Jones Indices, the company that operates the index. It will not affect the level of the index because the underlying calculation will be adjusted, the company said.
With 30 blue-chip companies as its members, the Dow index is closely watched as a barometer of the broader market. It has recovered strongly since the turmoil of the financial crisis and is up about 15 percent this year.
In contrast to the Standard & Poor’s 500-stock index, the Dow is calculated as a price-weighted index, so the stocks with the highest share price have the greatest weight. The three stocks that are being removed are priced in the single- or low double-digit range, putting them on the lower end of stocks in the index.
“They’ve dropped the smaller weights out of the index and replaced them with what they deem to be better candidates representing the way the economy is moving,” said Trista Rose, the global head of index strategy at UBS. “I wouldn’t say that it would have a noticeable impact on trading volume.”
The three new entrants to the index received a lift from stock investors on Tuesday, while shares of Hewlett-Packard and Alcoa were down. Bank of America’s stock, however, rose 0.9 percent to $14.61 a share.
For Alcoa, its exclusion is a symbolic comedown. The aluminum company, which joined the index in 1959, has traditionally kicked off earnings season. In recent years, the company has contended with a global slump in aluminum demand. Now it has been supplanted in the Dow by an athletic shoe maker, Nike.
“The composition of the Dow Jones industrial average has no impact on Alcoa’s ability to successfully execute our strategy,” Alcoa said in a statement on Tuesday. “We are focused on the things we can control.”
Bank of America and Hewlett-Packard, more recent entrants to the Dow, are each confronting challenges of their own.
The bank, whose entry into the Dow was announced in November 2008, has been working to shrink its business after the financial crisis. It has faced an array of legal issues, many stemming from its acquisition of the subprime lender Countrywide Financial in 2008.
While Bank of America’s stock is still trading well below its pre-crisis level, it has experienced gains in recent months after doubling last year.
In a statement on Tuesday, Bank of America noted the strong performance of its stock compared with the other companies in the index. “This decision has no impact on our business or our strategy for providing solid returns to shareholders,” the company said.
On Tuesday, Goldman cheered its new membership in the Dow, saying in a statement that it was “pleased to join this historic and significant market benchmark.”
And yet, Wall Street is a cyclical business, and brighter days may lie ahead for Bank of America, said Nancy Bush, a bank analyst with NAB Research.
“Goldman Sachs is by far the more cyclical of the two,” Ms. Bush said. “It may be valued bigger now, but when rates go up, the large banks that are suffering now are going to be much more profitable.”
Hewlett-Packard was only the second computer company in the Dow when it was added in 1997, coming after I.B.M. Now, it is fighting to turn around its business. In an example of its continuing woes, the company took a 79 percent write-down last year on its disastrous acquisition of the British software company Autonomy.
But the company put on a brave face on Tuesday, saying in a statement that it was “confident that we are making progress in our turnaround.”
“We are already seeing significant improvement in our operations, we are successfully rebuilding our balance sheet, our cost structure is more closely aligned with our revenue and we have reignited innovation,” the company said.
Its replacement, Visa, the San Francisco-based payments giant, has enjoyed a buoyant stock price in recent years on the strength of new payment technology. On Tuesday, the company said in a statement that it was “honored to be included with such a prestigious group of companies.”
Changes in the Dow have less trading significance than changes in larger indexes, like the S.&.P. 500 or the Russell 2,000, which are tracked by a range of investment products. Still, the Dow, which is the nation’s oldest index, continues to have symbolic heft.
The revamp in 2004 ushered in three companies that at the time were leaders in their fields: Pfizer, Verizon Communications and the American International Group. When A.I.G. had to be rescued by the government in 2008, the company was replaced iby Kraft Foods.
Another company that was cut from the Dow, General Motors, has since undergone a recovery.
“When you get put in the Dow, it is a lagging indicator. It means you’ve already succeeded,” said Daniel Seiver, a professor of finance at San Diego State University. “It’s like getting elected to the Hall of Fame.”
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