A Blog by Jonathan Low


Mar 6, 2015

Passing the iTorch: Apple Replaces ATT on the Dow Jones Industrial Stock Index

In a move whose symbolism can not be understated, it was announced today that Apple would replace ATT on the Dow Jones Industrial Index, the bellwether indicator of how 'the markets' are doing. It is, in a larger sense, the measure of how the American, and by extension, the global economy is doing.

There will be some who say that this is long overdue but the Dow has traditionally been the big company index while the Nasdaq has represented the faster growing stocks, many of them in the tech industry for the past twenty years.

Apple is supplanting ATT, the enterprise founded by Thomas Edison and whose arrival signaled the modern technological era. This suggests confirmation of the evident if not for all the obvious: that tech is now indistinguishable from business more broadly. No institution in the current environment can survive without technology. More subtly, it points to Apple's emphasis on the intangibles of design, look-and-feel and brand as indicative of the economy's transition from industry to service as the wave of the future. JL

Adam Shell reports in USAToday:

The Dow is not tech-oriented at all, so adding Apple adds to its tech (weighting). Apple will join current tech stocks, including Cisco, Intel, Microsoft and IBM. Apple also adds the best consumer marketer of our generation.
The Dow Jones industrial average might soon be nicknamed the iDow. On Friday, the keepers of the iconic stock index said Apple, the maker of the iPhone and iPad, would be added to the blue-chip stock index when trading opens on Thursday, March 19.
The powerhouse tech gadget-maker is replacing telecom player AT&T, a company whose participation in the Dow dates back to Oct. 4, 1916, according to S&P Dow Jones Indices.
"As the largest corporation in the world and a leader in technology, Apple is the clear choice for the Dow Jones industrial average,
" says David Blitzer, managing director and chairman of the Index Committee at S&P Dow Jones Indices.

In late-morning trading, Apple shares were up $1.65, or 1.3%, to $128.06, and shares of AT&T were down 62 cents, or 1.8%, to $33.38.
The 119-year-old Dow was down sharply, however, as a better-than-expected February jobs report is likely to prod the Federal Reserve to start hiking interest rates in June, which is earlier than the September liftoff Wall Street was betting on before the employment report was released. In late-morning trading, the Dow was off more than 175 points, or about 1%, to 17,960.
Wall Street has long speculated that Apple (AAPL), the world's most-valuable company, would join the world's best-known stock index. The Dow is a stock index composed of just 30 stocks. It dates back to the late 1800s. Back then, Wall Street Journal Editor Charles Dow came up with the idea. The industrial average was first calculated on May 26, 1896.
"The Dow has to change from time to time in order to truly reflect the changing nature of our economy," says Alan Skrainka, chief investment officer at Cornerstone Wealth Management. "That's why we like the change. No company is a better reflection of the innovative spirit and dynamic nature of the U.S. economy."
This is the first change in the Dow since Sept. 20, 2013, when footwear maker Nike, banking giant Goldman Sachs and credit card processor Visa were added, and tech player Hewlett-Packard, Bank of America and aluminum maker Alcoa were kicked out.
Adding Apple brings additional cachet to the already popular Dow, says Quincy Krosby, market strategist at Prudential Financial.
"The Dow continues to try and be 'relevant,' and certainly the addition of Apple underscores this," says Krosby.
The 30-stock index, which in its early days tracked the ups and downs of the industrial economy, has name recognition that few other stock indexes can match.
"The Dow is the people's index, the headline index that leads mainstream news," says Krosby. "And Apple is the stock that is found in so many portfolios. In that sense, Apple has become the stock for Main Street and Wall Street."
The joining of forces of the world's biggest company with what arguably is the world's highest-profile stock gauge is significant for two key reasons, says Dan Chung, chief executive officer at Alger.
While the Dow's small number of stocks makes it less relevant to professional investors, who prefer to benchmark their performance against the broader Standard & Poor's 500-stock index, there are pluses to Apple's addition to the blue-chip stock gauge, Chung argues. The biggest plus is that the Dow is now better reflective of the fast-changing world of technology.
"My feeling is that the Dow is not tech-oriented at all, so adding Apple is significant in that it adds to its technology (weighting)," Chung told USA TODAY. Apple will join current tech stocks in the Dow, including Cisco Systems, Intel Microsoft and IBM.
Adding Apple also adds a major "consumer brand" to the Dow, Chung adds. "This is the best consumer marketer of our generation, and they are selling 'more' than hardware or software — both literally and figuratively," says Chung.
The addition of Apple to the Dow industrials, however, won't "distort" the price level of the stock index, as the index will be recalculated prior to the start of trading on March 19 to take the addition of Apple and dismissal of AT&T into account.
The motivation for the move, according to Blitzer, was spurred by recent stock splits by Dow component Visa (V) as well as Apple. Before Apple's stock split, it was trading north of $700 per share, so at that point would have had too big an influence on the price of the Dow to be considered for inclusion in the price-weighted index. Visa's 4-for-1 stock split is slated to take effect the same day Apple enters the Dow.
The reason the stock splits are driving the lineup change is due to the fact that the Dow Jones industrial average is a price-weighted index, which means stocks with higher stock prices have a bigger influence on the price movement of the index. Visa's stock split means its stock price will automatically reset at a lower price when the split goes into effect. As a result, Visa will have a smaller impact on the Dow and also result in a reduction in the weighting of the "information technology" sector in the Dow.
The addition of tech giant Apple to the Dow "will help to partially offset this reduction," Blitzer said.
"The Dow is price-weighted so extremely high stock prices tend to distort the index while very low stock prices have little impact," Blitzer explained in a press release. "The timing of Apple's addition to the Dow hinged on two stock splits: Apple's 7:1 split last June and Visa's 4:1 on March 19th this year. Apple's split brought the stock price down closer to the median price in the Dow. The Visa split will reduce the technology weight in the Dow and make room for Apple."
In early trading today, Visa shares were trading at $273.83, which makes it, at the moment, the priciest and most influential stock in the Dow. After the split, the post-split shares will trade at roughly $68.45.
At current stock prices, Apple would rank as the fifth most expensive stock in the Dow after the Visa 4-for-1 split.
Among current Dow members, AT&T has one of the lowest stock prices. What's more, the keepers of the Dow felt that the index had too big a weighting in telecommunications stocks. Verizon (VZ) will continue to represent the telecommunications services sector in the Dow, Blitzer said.
Some pros expect Apple's entrance into the Dow to make it more volatile, due in large part to its higher stock price and the sheer number of investors who own and trade the stock on a daily basis.
Currently, a $1 move in the price of any Dow stock moves the index by 6.42 points, but once Apple is added and Visa's weighting dips after its stock split, the Dow will move 6.69 points, according to Robert Leiphart, an analyst at Birinyi Associates.
Soon the Dow's new motto could very well be, "As Apple goes, so goes the Dow."
And that means a weakening in Apple's stock price will weigh on the Dow, just as Apple declines now hurt the Nasdaq composite.
Adds Krosby of Prudential Financial: "With the inclusion of Apple in the Dow, Apple has to continue surprising to the upside in terms of product design. This could make the Dow subject to volatility if Apple doesn't live up to expectations quarter after quarter."
And while an awful lot of money is indexed against the Dow Jones industrial average, Apple's inclusion in the index won't add up to a huge buying binge for index fund managers that need to buy Apple shares so their fund's accurately mimic the new Dow weightings on March 19, Leiphart notes.
"Assuming $20 billion is indexed to the Dow, index funds will have to buy 7.37 million shares, or just 0.12%, of the shares outstanding," he says. "This compares to average daily volume of 58 million shares."


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