Dow Jones Changes May Favor Walgreens Over Amazon in a Historical Trend

The Dow Jones Industrial Average (DJIA), one of the oldest market indicators, has historically been managed with seamless transitions when new stocks are added. The process and construction of the 125-year-old index are kept confidential by S&P Dow Jones Indices, yet the impact of each stock is discernible upon changes.

Known as the 'Dow jinx', there is an observed trend where newly added stocks to the Dow often underperform compared to the ones they replace. This phenomenon could potentially spell a challenging year ahead for Amazon's stock as it joins the Dow, possibly lagging behind Walgreens, the stock it is set to replace.

Understanding the Dow's Unique Price Impact

The Dow differs from other indices in that its price is driven by the dollar-amount changes in its constituent stocks rather than market capitalization. A 'divisor' is applied to the price change of each Dow stock to deduce its influence on the overall index. As of a recent update, this divisor would slightly increase, meaning the other Dow stocks' price movements will have a marginally reduced effect on the index.

The Dynamics of Stock Price and Market Cap in the Dow

While Amazon may be the third-largest company by market cap in the Dow upon its entry, its actual price ranks it 17th out of 30. However, its stock price is considerably higher than that of Walgreens, which will alter the Dow's divisor. In the Dow's pricing structure, a higher stock price exerts a greater influence on index movements than a larger market cap.

The reasoning behind Amazon's inclusion is to enhance the index's exposure to consumer retail among other sectors, succeeding Walgreens which had a somewhat inverse correlation with the Dow.

The Mysterious 'Dow Jinx'

A curious pattern has emerged with the Dow, wherein stocks that enter the index tend to perform worse in the short term than those they ousted. This has led to speculation, based on historical data, that Walgreens might outperform Amazon's stock in the near term regardless of their respective market standings.

In the past, similar instances have occurred, such as when the tech behemoth Apple replaced telecom giant AT&T and then underperformed in the following year. Though the correlation between the index's stocks and maintenance goals is high, this anomaly has left many investors curious about the potential outcomes of these changes.

While the true reason for this 'Dow jinx' remains unknown, it'll be interesting to see how Amazon and Walgreens' stocks perform following this recent shift.

Stocks, DowJones, Amazon, Walgreens, Market