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The humiliation of the once-mighty GE (GE) continues. Yesterday, we learned that after over a century of the company’s stock being a part of the Dow Jones Industrial Average, it was being booted out of the exclusive club of thirty stocks that make up that index and was replaced by Walgreens Boots Alliance (WBA).
In some ways, given GE’s precipitous decline since the end of last year, that should come as no surprise but even predictable things can be shocking when they eventually happen. However, once the initial shock of the removal of what was once the world’s largest company from America’s iconic index subsides, investors should be asking themselves what it means, not just for the two stocks concerned, but also for the market as a whole.
The impact on the two stocks is already being felt, as GE fell and WBA rose in after-market trading following yesterday’s announcement. That is because while inclusion in the Dow bestows a certain stature to a company, it also has very real effects on demand for the stock.
Increasing evidence of the efficacy of investing in index funds and the advent of ETFs that make that easy and cheap for investors to do have combined to make those funds increasingly influential. The largest such ETF when it comes to the Dow (DIA) alone has well over $22 billion in assets, so as they all sell GE and buy WBA to keep up with the change, the moves in both stocks are inevitable.
More interesting, and potentially more impactful though, is what this tells us about the U.S. economy in a broader sense. It is yet another confirmation that America is no longer a country that, at the top at least, makes things; it is one that is built on ideas and services.
The Dow is the most followed index in America, but there is a reason that financial professionals generally prefer to track a broader index such as the S&P 500. When the Dow was created in 1896 it consisted of only twelve companies but was expanded as the economy grew. The last increase in the number of components, however, came in 1928. Obviously there has been massive growth in the U.S. economy since then, so the fate of thirty companies has become less indicative of the overall market over time.
To compensate for that, the committee that decides who is in and who is out has increasingly moved away from the index’s manufacturing and materials bias. The last change to the makeup of the index came in 2009, when AT&T (T) was replaced by Apple (AAPL). That shift reflected the change in telecommunications away from land lines and towards mobile technology, but it also reflected something else.
Apple is a company that develops and markets products but has them manufactured outside the country. That marked the institutional recognition of the new form of globalization and the impacts of that are being felt strongly now. Donald Trump was, after all, elected on a platform of fighting back against that fundamental shift.
This change reinforces that shift in a couple of ways. First, Walgreens Boots Alliance is the result of a merger between the American pharmacy Walgreen’s and its British equivalent, Boots. They operate in multiple countries and source products from even more. They are therefore by definition a globalist company. Donald Trump and his supporters may not like it, but this is yet another indication that globalization remains a thing.
Even more significantly for long term investors, WBA is, like Apple, not a manufacturing company in the traditional sense, and are in an industry that is growing rapidly. One could argue that eventually the growing proportion of the wealth of America, and the whole world, that is going into healthcare must cause problems and must come to a screeching halt.
So far, though, the reality is that the massive growth in the sector continues.
The simple fact is that the change to the Dow that was announced yesterday is not just symbolic. It is significant in several ways. It will have a real, lasting impact on demand for the two stocks directly involved and is yet another indication that the shift in America away from manufacturing and towards services is relentless and continuing even as the political realm attempts to deny it. Investors should take note of both.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
