Markets are in for a bit of a rejigger as Apple’s stock split leads to a reweighing of the Dow Jones and major indexes continue to break records.
The Dow Jones Industrial Average, an index of top stocks that is used to track the markets performance, announced Monday it’s replacing three of its components, including its oldest.
Out is longstanding oil giant Exxon Mobil, pharmaceutical maker Pfizer and defense contractor Raytheon. In are cloud software seller Salesforce, biopharmaceutical maker Amgen and manufacturer Honeywell.
“It’s out with the old and in with the new,” said Andy Cross, chief investment officer for Motley Fool. “The Dow is trying to stay more relevant.”
Technology, services and health care, “are where a bulk of the growth in company and consumer value is going to come from over the next decades,” he said.
The Dow Jones organization said in a statement that the move was prompted by Apple’s stock split, set for August 31st, which would have reduced the index’s weighting in the information technology sector.
“The announced changes help offset that reduction,” it said in a statement. “They also help diversify the index by removing overlap between companies of similar scope and adding new types of businesses that better reflect the American economy.”
The removal of Exxon comes amid a global oil slump as demand plunged during a recession tied to pandemic lockdowns. Following its removal, Chevron will be the only oil and gas company left in the index.
Financial experts said the changes to the index reflected more about how the Dow is calculated than the overall structure of the economy.
“The Dow Jones Industrial Average is a price-weighted index so stocks with high share prices have more of an influence on the movement of the index,” said Greg McBride, chief financial analyst for Bankrate.com. Apple had been the highest price stock in the Dow.
“With Apple splitting 4-for-1, certain adjustments were necessary so the influence of the information technology sector on the Dow was not diminished,” said McBride.
Futures were up Tuesday as China and the U.S. governments reported having a positive phone call overnight about implementing the phase one trade agreement. Following tit for tat escalating tariffs, the two countries announced an initial agreement in January that called for greater purchase of U.S. goods, protection of intellectual property and access to Chinese markets, but relations have been markedly strained in the following months under the coronavirus pandemic.
The Dow Jones was up 17 points and the S&P up .13 percent to 3,432 points. Both the S&P and Nasdaq set record highs on Tuesday, with the S&P cresting 3,400 for the first time, breaking levels set just the Friday prior.
Despite coronavirus business impacts, last week stocks recovered from the quickest bear market on record, defined as a 20 percent fall in values.
The new highs, driven by consumer discretionary shares, showcase the continuing dislocation between Main Street and Wall Street as unemployment remains at historic highs and ebbing relief funding accelerates the shuttering of vulnerable small businesses.
Cross said the stock market is a “fortune teller” looking ahead to a potential coronavirus vaccines and signs of businesses returning and employment improving.
“The S&P is a relatively large-cap market so it measures the performance of the largest public companies,” said Cross. “So much of the struggles and suffering that citizens are feeling are coming from small and medium sized businesses that need macro government support just to help pay the bills during quarantines.”
The market swings has also prompted the closure of a record number of ETFs, or exchange traded funds. ETFs are a collection of investments in particular sectors that track an underlying index but the the ETF itself is sold on an exchange like a stock.
A total of 188 have closed this year, according to FactSet.
Large firms have been trimming funds that failed to attract interest and the market gyrations have hammered ETFs that relied on leveraged bets to broaden their exposure to aspects of the market, particularly those on oil, gold, and silver.
“This is as much a clean-up after a crazy nine volatile months in the market” and an oversaturation of new ETFs opening up, said Cross.