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How Now, Thou Dow?

Walgreens sign
photo by Mike Mozart

I think it’s time to rebrand the world’s most over-hyped equity benchmark. Maybe the Dow Jones post-industrial average?

Effective next week, America’s archetypal industrial enterprise, General Electric Co., will no longer be among the select group of 30 stocks whose daily price movements are reported all over the world and yet practically ignored. A committee of executives at S&P Dow Jones Indices has decided to replace GE with Walgreens Boots Alliance Inc., which you know as your local drive-in drugstore if you are American, or just as “Boots” if you happen to be in England.

When the local greeting-card and aspirin purveyor becomes part of an “industrial” average, well, it just isn’t an industrial average any more. But it really has not been that for some time.

There certainly are industrial firms still in the Dow 30. DowDuPont Inc. has to qualify by anybody’s standards. So do integrated energy giants like Exxon and Chevron, and heavy-equipment makers like Caterpillar and Boeing. I would put 3M in this category, and I will credit Intel and IBM because they still manufacture a lot of what they invent and sell (although IBM has worked hard to convert itself into primarily a service vendor).

But Apple really is not “industrial,” at least not in the 20th century sense of that word. It is a design, marketing and retailing company. The industrial work of actually manufacturing its products is outsourced to Foxconn and other genuine industrial firms all over the world (but almost entirely outside the United States). Ditto Nike, which is really in the same business as Apple when you think about it.

Walmart and Home Depot are big companies, but they aren’t “industrial.” McDonald’s? If you think so, you may have had one too many Happy Meals. Big as it is, Mickey D’s is still just a franchised chain of burger and shake stands.

The Dow is heavy with financial stocks: American Express, Goldman Sachs, JPMorgan Chase, Visa. These are important companies in important businesses, but they don’t make stuff you can touch, wear or eat.

Pulling GE out of the Dow symbolizes how much that company has fallen upon hard times, largely of its own making. That decision is about a particular company. It is the decision to replace GE with Walgreens that tells us how much the world has changed.

The Dow itself is really just an artifact of an earlier era, one in which a recently industrialized America was first taking its place among the world’s great economic powers. Today the financial news media still breathlessly reports daily movements in the index, and every time it hits a big round number it is treated as some sort of historic event. Financial advisers, myself included, still get anxious phone calls from some clients who become alarmed when they hear “the Dow plunged 600 points today.” For reference, that drop is about 2.5 percent of the index’s current value. A one-day movement of this magnitude is just noise for a typical investor, who should be focused on both the longer term and the broader market.

My colleagues and most of our peers almost universally ignore the Dow except when we are talking to clients who care about it. The Wall Street Journal, whose editors sit on the committee that decides the Dow’s membership, reported that less than $30 billion sits in index funds designed to track these 30 stocks. That’s a rounding error compared to nearly $10 trillion – notice the “t” – that tracks the more representative S&P 500 index.

I can’t fault the index selection committee for keeping the Dow 30 more or less representative of the economy in which we live, as represented by a small sample of some of America’s most prominent public corporations. But as long as they are keeping the index up to date, they may want to start with changing the name. The Dow Industrials just are not very industrial any longer.

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