What Happened To Dow Safety?

It was just a few weeks ago there was chatter that the Dow wouldn’t go down as much as other indices for a few reasons.  First, the Dow contains all really big companies that could withstand economic downturns.  After all, they have cash, their established companies, and they can go several quarters with losses.  Small companies can’t survive in that environment, can they?  Secondly, the Dow, unlike the S&P 500, is weighted by points, not market cap.  Each component drop of a dollar is worth roughly 7 Dow points.  Therefore, when stocks get to $10 or so, how much lower can they go?  That was the theory.  Well, for 2009,  the Dow is the worst performing index of the big three, down almost 15% year to date.  Why?  Because, many of the struggling financials are in the Dow and with financials hitting new lows, down goes the Dow.  Citigroup, Bank Of America, American Express, JP Morgan, & General Electric are all part of the Dow Jones. 

The most interesting part about the components is the fact that theoretically the Dow Jones isn’t supposed to have stocks in it less than $10.  Right now, there are four stocks under $10.  General Motors, Citigroup, Bank of America, & Alcoa.  General Electric is at $10.03.  So, why haven’t they replace them?  My theory is the following.  Citigroup can only fall $2.  That’s only 14 Dow points.  What if they replaced Citigroup with a $100 stock?  If it fell to zero, that would be 700 Dow points.  You think they’ll run that risk right now of the Dow falling to 6000, 5000, etc.?  So, the components remain the same.  It’s probably time though for a fresh new look for the Dow Jones.  There are changes every few years and I think it’s time.  the Dow Jones is really supposed to reflect our economy.  Where’s Google?  Where’s Apple? 

Just like dividend paying stocks aren’t as safe as they appear, neither is the Dow Jones.  Heck, the scary tech laden risky Nasdaq is only down 7% for the year.

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