Over the first few weeks of 2014, the market has seemingly gone down nearly every day. Looking at things a little closer, we can see that the Dow Jones Industrial Average has been sloppy so far this year. However, many of the broader markets haven’t been down like the Dow. The stocks that make up the Dow get the most headlines though, so the sloppiness in that index has created a negative perception of the market as a whole. Tom and Brendan discuss a potential reason for the volatility we’ve seen in the DJIA so far this year.
On September 23, 2013 some changes were made to the Dow Jones Industrial Average, and they’ve had an impact on the way the index has behaved since. Bank of America (BAC), Alcoa (AA), and Hewlett Packard (HPQ) were dropped from the index. They were replaced by Nike (NKE), Goldman Sachs (GS), and Visa (V). So why is this significant? This change took three of the lowest priced stocks included in the Dow, and swapped them out for three highly priced replacements.
In a price-weighted index, like the Dow Jones Industrial Average, changes of this manner are a big deal. The high prices of Nike (NKE), Goldman Sachs (GS), and Visa (V) have created more volatility in the Dow than we’ve seen in recent years.
Tom and Brendan also talk about how some other market indexes have been doing in 2014. While it may feel like the market has been down every day, that’s not really the case. The Dow Jones Industrial Average has been down 1.23% so far. However, the S&P500 is down just 0.2%. The NASDAQ is up 1.59% and the Russell 2000 is up 1.52%. The overall picture looks a little less bleak when more indexes are taken into account. A point to remember is that the Dow is a price weighted group of 30 large cap stocks. It does not define the market as a whole, and it shouldn’t be treated as if it does.
Tune into this week’s Mullooly Asset Management podcast to hear more about the Dow’s volatility so far in 2014.
*All market data quoted through close on 1/22/2014, courtesy Dorsey Wright & Associates*