Dow Jones Price Outlook:
- An Apple stock split is set to take place on August 31, a move that would significantly alter the index’s sectoral weightings
- To combat the shift, S&P Indices Dow Jones announced three stocks will be replaced on the Average
- Dow Jones: A True Cross Section of American Industry?
Dow Jones Forecast: Apple Stock Split Prompts Major DJIA Changes
The Dow Jones Industrial Average is set to undergo a major change before next week after a 4-for-1 Apple stock split necessitated modifications to the blue-chip index. As the index’s highest weighted member at roughly 12%, Apple commands significant sway over the entire collection of stocks and a stock split from AAPL would shift the exposure of the index drastically. Thus, S&P Dow Jones Indices has announced it will change three components before the market opens on August 31.
Source: Business Insider & DailyFX
Raytheon, Pfizer and Exxon Mobil are the three constituents destined for removal, the latter of which has been a Dow Jones staple since it was added in 1928, then known as Standard Oil. In their place will come Honeywell, Amgen and Salesforce as S&P Dow Jones Indices looks to recoup some of the weighting lost by the technology sector and better reflect the industries of the American economy. To that end, a 4-for-1 split will send Apple’s rank from first to seventeenth - at current prices – and reduce the tech sector’s weighting on the index by roughly 9% if not for the addition of Salesforce.
Without the change, therefore, the Dow Jones would likely fall further behind the Nasdaq 100 and S&P 500 which have higher exposure to the high-flying technology sector. While many market pundits have argued some stocks in the industry have ballooned into a bubble, they have been the commanding force behind the covid recovery rally. As a result, their price gains are crucial to the performance of the broader index.
Learn all about the history of the Dow Jones: Dow Jones: A True Cross Section of American Industry?
That said, the quick decision from the index curators is commendable, but it also highlights some of the downfalls of the price-weighting system employed by the Industrial Average. Exchanging three stocks in a single transactions equates to a 10% turnover in the Dow Jones – an actuality that could give rise to increased volatility in some of the stocks slated to change listings.
Dow Jones Price Chart: 4 - Hour Time Frame (June 2020 – August 2020)
In terms of immediate price reactions for the entire index, the transition should see little effect. Over the longer term however, the addition of Salesforce – set to be the sixth largest component – could help the Dow play catch up with the Nasdaq 100, especially if Apple continues its parabolic rally and reclaims lost control. In the meantime, follow @PeterHanksFX on Twitter for further stock updates and analysis.
--Written by Peter Hanks, Strategist for DailyFX.com
Contact and follow Peter on Twitter @PeterHanksFX
