Too Many Lousy Financial Stocks Have Kept the Dow Down This Year -- Here's How to Fix That

For the three and a half months of 2014 that ended on Tax Day, the Dow Jones Industrial Average (DJINDICES: ^DJI  )  lost about 1.4%. Over the long run, this is pretty middling -- if the index performs similarly for the rest of the year, it would be weaker than 77 other years of the Dow's history stretching all the way back to 1896. On the other hand, it would be a better performance than 40 other years.

This year, as has often been the case when investors gravitate toward the stocks of smaller and newer companies, the Dow has underperformed its broader peer, the S&P 500 (SNPINDEX: ^GSPC  ) , which is trading essentially flat past Tax Day. There are a few possible reasons for this situation, but one merits particular attention -- the Dow's overreliance on financial stocks has hurt it this year, as all but one sector component has underperformed the index as a whole:

^DJI Chart

^DJI data by YCharts.

Because these six components alone contribute over a quarter of the Dow's total value, they've been responsible for the lion's share of its decline. Goldman Sachs (NYSE: GS  ) , the Dow's worst performer to date this year, is such a large part of the Dow that it effectively cancels out the gains of the index's two best-performing stocks, Caterpillar (NYSE: CAT  ) and Merck (NYSE: MRK  ) , which have each gained about 13% in 2014:

GS Total Return Price Chart

GS Total Return Price data by YCharts.

Since the Dow is price-weighted, Goldman's current share price of $156 more or less balances out Caterpillar's $103 shares and Merck's $56 shares. The same problem crops up with the Dow's other best performers, which are negated by lousy financial stocks with large share prices. IBM (NYSE: IBM  ) has gained nearly 6% this year, and in any other year it would have been a major force for gains, but since Visa (NYSE: V  ) supplanted it as the Dow's largest-weighted component, it's been completely negated by the credit card issuer's doldrums:

IBM Total Return Price Chart

IBM Total Return Price data by YCharts.

I've pointed out before that the Dow depends too heavily on financial-sector stocks, and this could probably be remedied without too much difficulty. My suggestion, which would finally give the completely unrepresented real-estate sector some visibility on America's most-watched index, would be to replace Goldman Sachs -- a company that most Americans would argue should not represent the U.S. economy anyway -- with Simon Property Group (NYSE: SPG  ) , the country's largest publicly traded real estate investment trust. With that one change in place, the Dow would probably become a much stronger index, both in terms of economic representation and performance:

^DJI Chart

^DJI data by YCharts.

Since Simon's shares are now more valuable than Goldman's, the change would provide stronger representation for real estate than it would have when I first made this suggestion, and it might be enough to swing the Dow to a gain -- and a new record -- for 2014.

Do you think this change makes sense? Would the Dow be a better index with a REIT on its roster? Let me know what you think by leaving a comment below.

Big banking's little $20.8 trillion secret
There's a brand-new company that's revolutionizing banking, and is poised to kill the hated traditional brick-and-mortar banks. That's bad for them, but great for investors. And amazingly, despite its rapid growth, this company is still flying under the radar of Wall Street. To learn about about this company, click here to access our new special free report.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2917797, ~/Articles/ArticleHandler.aspx, 10/22/2014 5:46:25 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement