The Dow Jones drops GE – what does that say about our economy?
Updated: Jan 29, 2020
This past week the Dow Jones dropped General Electric (GE) from its group of 30 stocks. GE was the last remaining original member of the Dow and had been listed continuously since 1907. Beginning in June 26, GE will be replaced in the index by Walgreens Boots. Exxon Mobil is now the longest tenured member, having joined the Dow in 1928.
To understand what this means, we need to start by knowing what the Dow itself represents. When most Americans track stock market performance they are referring to the Dow. The US has other major indexes like the S&P 500 and NASDAQ but most Americans aren’t very familiar with where those markets stand but they do with the Dow. As a result, the Dow is what many Americans refer to as the ‘stock market’.
The reality though is the Dow is only made up 30 stocks which are intended to be a reflection of the overall US economy. The Dow is short for the Dow Jones Industrial Average (DJIA) and began as a stock tracking tool over 100 years ago. The early days of the Dow reflected the US economy at the time by being heavy on Industrial companies. This has continued to evolve over time as can be seen by looking at a listing of the current Dow components
GE was removed from the Dow because its stock price had simply fallen too low. At the time of announcing the decision to drop GE the stock price was sitting at roughly $13 per share while another component, Boeing, was trading at over $330. The Dow is a price weighted index meaning that the market movement is driven by the relative price of each stock. For instance a stock trading at $200 has twice the impact of a stock trading at $100. So GE at $13 was accounting for less than .5% of the Dow. In short, it had stopped being relevant in terms of the market which is a stunning statement for a company that as recently as 2016 was still one of the top 10 global companies in terms of market cap. In the past several years the company has faced accounting issues, heavy debt loads and a string of questionable business moves. A 55% drop in stock price over the last year was too much to overcome to maintain its status as one of the mainstay companies of the economy.
This is just another indication of how much the US economy has changed. The traditional titans of industry are largely gone from the Dow and it is harder and harder to find companies to fit that profile. Tech companies continue to play a larger role in the markets and in the economy. 7 of the 10 largest market cap companies in the world are tech companies and all four of the largest are US based tech companies. Interestingly, two of these companies, Google and Amazon, are not components of the Dow.
The overall US economy is strong and has shown the ability to be resilient and adapt better than any other modern economy has. That said, the removal of a company like GE from the Dow is another signal that we are continuing to move away from an industrial based economy and instead rely on finance, tech and services on an increased basis.