Ad Hoc Commentary – the new Dow is skewed towards financials: Visa and Goldman

Yesterday, the Dow Index threw out Hewlett-Packard, Alcoa and Bank of America. And they took in Visa, Nike and Goldman Sachs. Since the Dow is a price weighted index, the table below shows the weighting of the Dow before and after the change:-

Industry 20-Sep-13 23-Sep-13 Change
Basic Materials 3.4 2.5 -0.9
Consumer Goods 5.9 7.8 1.9
Consumer Services 15.6 13.1 -2.5
Financials 11.5 24.0 12.5
Health Care 11.8 9.9 -1.9
Industrials 22.6 19.1 -3.5
Oil & Gas 10.6 8.9 -1.7
Technology 14.5 11.3 -3.2
Telecommunications 4.1 3.4 -0.7
Grand Total 100.0 100.0 0.0

As you can see, the financials now make up 24% of the new Dow Jones Industrial Index. The 24% consists of American Express (3.2%), Goldman Sachs (6.9%), JPMorgan Chase (2.1%), Travelers (3.6%) and Visa (8.2%). The main increase comes from the inclusion of Visa (8.2%). Replacing Bank of America (0.7%) with Goldman Sachs (6.9%) explains the other part of the 12.5% increase for financials.

No matter how you look at the latest GDP figures from the commerce department, financial services and insurance is at most 7.5% of United States GDP in Q2 2013 (ref page 8 of the document at

Including Visa makes sense because electronic money will likely be made mandatory by governments to get the informal economy to pay taxes. Visa and MasterCard should benefit. However, the experience of IBM and Microsoft during the boom reminds us that victory for Visa is far from guaranteed. We remember that Microsoft benefited massively from the personal computer revolution even though IBM was THE computer industry.

On the other hand, yours truly is pleasantly surprised that Bank of America was replaced by Goldman Sachs. The Golden Years of highly leveraged proprietary trading is probably ending. Politicians are distancing themselves from the speculative proprietary traders. The withdrawal of Larry Summers from the Fed race is just a manifestation of their declining clout. It is very likely that the next time the proprietary traders lose big, their losses will not be underwritten by taxpayers. It is probably more prudent to keep Bank of America in the blue-chip index.

The inclusion of both Visa and Goldman probably makes the Dow index a little too risky for boring bond traders who are flighting the sovereign debt crisis. In the past, the Dow was the boring blue chips, the Nasdaq the risky stocks, and the S&P500 the broad market. The changing of Dow components probably put the Dow and Nasdaq in the risky camp. Since the fuel for equities moving forward is capital moving from boring government bonds into boring dividend paying stocks, the S&P500 should outperform the Dow in the future. Of course a broad index on boring dividend paying blue chips would likely trump them all.

Good luck in the markets.

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