Yes, the Dow Hit 17,000 Today. And No, You Shouldn't Care

Disney's magic touch helps the Dow; Rite Aid and PetSmart rally for two entirely different reasons.

Jul 3, 2014 at 8:00PM

Do you remember? Do you remember where you were when the Dow Jones Industrial Average (DJINDICES:^DJI) hit 13,259 for the first time in recorded history? If you don't, it's perfectly OK. Don't give yourself too much grief. It's hardly criminal. It's just that, well -- 13,259 is a prime number. That's all. Thought you might have remembered how quirky that was.

Sure, it's nice for one of the world's most commonly quoted measures of corporate success to be above a new "psychological barrier," a euphemism that, in this context, means: "You can remember the number 17,000, can't you? Pretty big, ain't it? Jeez -- what an economy! Where will it go next?"

Before Thursday's holiday-shortened session was over, it would advance 92 points, or 0.5%, to end at 17,068, whizzing past the prime number 17,053 in the process. Remember where you heard it first.

Shares of Walt Disney (NYSE:DIS) helped the Dow reach its record-setting close on Thursday, in a show of brute force that saw the benchmark index clear a dozen previously unsurpassed prime numbers -- prime numbers correlating to the Dow's 30-component, price-weighted average -- by the day's end. Despite Disney's presence in the index, the Dow's new record isn't nearly as magical as we like to think it is. The Dow has the ability to add or drop stocks from its elite circle, which can misrepresent the state of the economy when poorly performing stocks are replaced with shares of more robust companies, for instance. This has happened literally dozens of times since its debut in 1896 as a 12-stock average, the first occurring a mere three months after its inception, and the most recent change occurring less than a year ago.

Indexes are thought to give us a broader sense of how companies are performing, but even in the most generous hypothetical cases, the Dow fails to tell us much of anything. It's a price-weighted index of just 30 stocks, meaning the everyday zigs and zags that are supposed to mimic the fluctuations of the American economy are determined by 30 stocks, any of which can be replaced on a whim, and whose contribution to the index is measured by their share price, not their size. Goldman Sachs, for instance, is the fifth-smallest blue chip component; yet -- because of its "high" share price -- it has more power to move the index than 27 of its peers.

While there are many others, Rite Aid's (NYSE:RAD) stock is particularly ill-suited for a comparison against the Dow's performance. The drug store, with a market cap just above $7 billion, is less than a quarter of the size of the Dow's smallest component. But Rite Aid investors are doing just fine without the Dow to serve as a constant comparison. Shares jumped 5.6% today as last month's same-store sales increased a booming 7.5% month over month, driven by revenue from its pharmacy. With increasing competition from other drugstores to recruit recurring pharmacy customers via techniques like loyalty programs, the longer-term concern is whether Rite Aid's slim margins can hold up or not.


Jana Partners might just groom PetSmart to its liking. Image Source: PetSmart

Finally, shares of PetSmart (NASDAQ:PETM) soared 12.5% on Thursday as the activist investing firm Jana Partners announced a nearly 10% stake in the pet accessories retailer, prompting Wall Street to rub its hands in anticipation of shareholder value-producing changes. Activist investors, by definition, take a meaningful stake in a public company, and then proceed to shake things up, often through spinoffs, executive shakeups, the shuffling of board members, and capital restructuring. PetSmart, which saw profit growth decelerate from 34% annually to just 7% last fiscal year, may need the help.

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John Divine has no position in any stocks mentioned. You can follow him on Twitter @divinebizkid and on Motley Fool CAPS @TMFDivine.

The Motley Fool recommends Goldman Sachs, PetSmart, and Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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