Happy birthday 'new' Dow

Happy birthday, 'new' Dow

October 26, 2000: 5:52 p.m. ET

A year after going 'digital,' the Dow stands stagnant. Is anyone to blame?
By Staff Writer M. Corey Goldman

NEW YORK (CNNfn) - With all the twists and turns the stock market has taken in the past year, one could not be blamed for casting a wary eye to the editors of the venerable Wall Street Journal -- the folks who a year ago decided the almighty Dow Jones industrial average needed a dose of tech.

Thanks kindly, Dow, and thanks very much, Jones. Entering software behemoth Microsoft Corp. (MSFT: Research, Estimates), chipmaker Intel Corp. (INTC: Research, Estimates), communications company SBC Communications (SBC: Research, Estimates), and home improvement retailer Home Depot (HD: Research, Estimates) into the Dow 30 at the peak of their stock price -- the pinnacle of their profit outlook -- wasn't all that bright.

But before racing down to Wall Street to storm the Journal's newsroom with ice pick in hand, consider this: The index would likely have fared worse had the four "old economy" firms that were unceremoniously dumped from the index a year ago remained in the ranks today.

To truly calculate what the Dow's point level would be today had it retained Chevron (CHV: Research, Estimates), Sears Roebuck & Co. (S: Research, Estimates), and/or Goodyear Tire and Rubber Co. (GT: Research, Estimates) would be a smart feat. Remember, too, that Union Carbide (UK: Research, Estimates) was part of the average, but came under review after its $11.6 billion buyout of Dow Chemical Co. (DOW: Research, Estimates).

It could have been worse ...

Looking at the performance of the companies that joined and those that were removed from the average, it is not difficult to conclude that the Dow might not have a 10-handle on it even if the stock gauge had been left untouched.

Here's how it breaks down. Of the four "new economy" stocks that officially joined the Dow 30 on Nov. 1, 1999, Microsoft is currently down 31 percent. Intel has gained 18 percent. SBC Communications is about unchanged, while Home Depot has fallen 24 percent.

As for the four "old economy" companies, Chevron's stock has declined about 8 percent, Sears, Roebuck & Co. is almost unchanged, Goodyear Rubber and Tire Co. is down 56 percent, and Union Carbide is down 41 percent.

So what would have been had the powers that be at the Journal left their almighty index alone? How would the Dow Jones industrial average look without the likes of a software giant and a chipmaker in its midst?

"Those new stocks haven't really helped all that much, but I don't think they've actually hurt all that much, either," said Yale Hirsch, a stock market strategist and publisher of the Stock Trader's Almanac. "Their formula for picking stocks isn't the end-all, but it's what people know."

Hirsch pointed to the Journal's decision back in 1939 to drop International Business Machines (IBM: Research, Estimates) from the Dow 30. Then, in 1969, the decision-makers at the Journal decided that Big Blue really was reflective of the U.S. corporate landscape, opting to put the computer maker back in the index.

"Had they left IBM where it was, the index easily would have been 1,500 points higher during that time," Hirsch said. "But how can you give them praise or blame? They are just making up an average."

It's the company, not the stock

No matter what companies comprise the Dow, the index has certainly suffered from stagnation in the past year. On Oct. 26, 1999, the Dow closed at 10,302.13. A year to the day, it closed at 10,380.12, leaving it 78 points higher in the course of a year.

That's nothing compared to its younger rival, the Nasdaq composite index. While the Nasdaq is currently up about 12 percent from its 2,811.47-close a year ago, it is down more than 37 percent from its all-time high of 5,048 reached March 10.

Either way, analysts agree that adding bellwether companies such as Microsoft and Intel in the Dow average was long overdue -- that including companies that are more reflective of the U.S. economy is part and parcel of establishing and maintaining the index, no matter what the stocks do.

"Whether the Dow is at 11,000, 12,000, 25,000 -- the simple truth is that those companies are chosen to be a part of the Dow for a reason," said Michael Lehmann, a professor of economics at the University of San Francisco and an expert on the Dow and U.S. economic history. "It's amazing for 30 stocks that it does such a good job."