By Matt Bacon

August 25th, 2020

Note: Carmichael Hill maintains positions in Exxon, Apple, Amgen, Pfizer, and Raytheon

A meaningless shakeup in the Dow Jones Industrial Average was announced yesterday evening. Exxon, Raytheon, and Pfizer are out. Honeywell, Amgen, and Salesforce are in. The changes will take place on 8/31. According to the press release from S&P Dow Jones indices, the changes are due to the 4:1 Apple stock split. The split will bring down the price of Apple stock, which will reduce its impact on the DJIA as it is a price-weighted average.

DJIA YTD Performance

With less of a tech-impact, DJIA elected to remove Exxon and put in Salesforce, a cloud company. The net effect will rejigger the average so that the tech sector has roughly the same impact following the Apple split as it did before. This marks a sad day for Exxon, who has been included in the average since 1928 when it was still Standard Oil. Just seven years ago Exxon was the world’s largest company. It’s a true loss of honor for the beleaguered oil major.

Despite the ignominious exclusion of Exxon, the impact of the change is largely ceremonial. Very little money is actually pegged/tied to the DJIA in passive or indexed strategies. It will be investor sentiment that moves the price of Exxon, which is down close to 3% on the news. Conversely Amgen (AMGN), Honeywell (HON), and Salesforce (CRM) are all trading up on the news by around 3%-4% each. The bump up/down in share price for these companies is short-term and temporary. We’re not trading based on this news.

The shakeup will “diversify the index by removing overlap between companies of similar scope and adding new types of businesses that better reflect the American economy”, S&P said in a news release announcing the changes. This is only half-true. Raytheon and Honeywell are similar industrial conglomerates with market caps both close to $100bn, but Honeywell trades at a price nearly three times that of Raytheon. This will give Honeywell and the industrial sector it represents nearly three times the influence of Raytheon in the price-weighted DJIA. Similarly Amgen, which is a Biotech firm, will replace pharma giant Pfizer. Amgen stock trades at a price about six times that of Pfizer.

Periodic shakeups in the Dow Jones industrial Average are nothing new. Changes have been made in 2013, 2015, 2018, 2019, and now 2020. Odds are we’ll see more shakeups in another two or so years, or possibly sooner if any of the constituent companies break out on a spectacular run.

Honestly, we’re fairly nonchalant about the whole thing. Shakeups in the S&P 500 are what matter. There are trillions of dollars tied to that index. The Dow holds outsized prominence due to its long tenure and historical precedent. Once upon a time, shakeups in the DJIA actually mattered! But those days have come and gone. The rise of indexing and market cap weighted indices have made the DJIA all but irrelevant. News like this is good for talk around the office watercooler (or whatever the Zoom equivalent is now), but beyond that there’s no real zeal to the changes.

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