Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Dow Short-term Trend Analysis - Coronavirus Trigger a Stocks Bear Market? - 24th Feb 20
Sustained Silver Rally Coming? - 24th Feb 20
Should Investors Worry about Repo Market and Buy Gold? - 24th Feb 20
Are FANG Technology Stocks Setting Up For A Market Crash? - 24th Feb 20
Gold Above $1,600 Amid FOMC Minutes and Coronavirus Impact - 24th Feb 20
CoronaVirus Pandemic Day 76 Trend Forecast Update - Infected 540k, Minus China 1715, Deaths 4920 - 23rd Feb 20 -
Ways to Find Startup Capital - 23rd Feb 20
Stock Market Deviation from Overall Outlook for 2020 - 22nd Feb 20
The Shanghai Composite and Coronavirus: A Revealing Perspective - 22nd Feb 20
Baltic Dry, Copper, Oil, Tech and China Continue Call for Stock Market Crash Soon - 22nd Feb 20
Gold Warning – This is Not a Buying Opportunity - 22nd Feb 20
Is The Technology Sector FANG Stocks Setting Up For A Market Crash? - 22nd Feb 20
Coronavirus China Infection Statistics Analysis, Probability Forecasts 1/2 Million Infected - 21st Feb 20
Is Crude Oil Firmly on the Upswing Now? - 20th Feb 20
What Can Stop the Stocks Bull – Or At Least, Make It Pause? - 20th Feb 20
Trump and Economic News That Drive Gold, Not Just Coronavirus - 20th Feb 20
Coronavirus COVID19 UK Infection Prevention, Boosting Immune Systems, Birmingham, Sheffield - 20th Feb 20
Silver’s Valuable Insights Into the Upcoming PMs Rally - 20th Feb 20
Coronavirus Coming Storm Act Now to Protect Yourselves and Family to Survive COVID-19 Pandemic - 19th Feb 20
Future Silver Prices Will Shock People, and They’ll Kick Themselves for Not Buying Under $20… - 19th Feb 20
What Alexis Kennedy Learned from Launching Cultist Simulator - 19th Feb 20
Stock Market Potential Short-term top - 18th Feb 20
Coronavirus Fourth Turning - No One Gets Out Of Here Alive! - 18th Feb 20
The Stocks Hit Worst From the Coronavirus - 18th Feb 20
Tips on Pest Control: How to Prevent Pests and Rodents - 18th Feb 20
Buying a Custom Built Gaming PC From Overclockers.co.uk - 1. Delivery and Unboxing - 17th Feb 20
BAIDU (BIDU) Illustrates Why You Should NOT Invest in Chinese Stocks - 17th Feb 20
Financial Markets News Report: February 17, 2020 - February 21, 2020 - 17th Feb 20
NVIDIA (NVDA) GPU King For AI Mega-trend Tech Stocks Investing 2020 - 17th Feb 20
Stock Market Bubble - No One Gets Out Of Here Alive! - 17th Feb 20
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

GM’s Bankruptcy and Changes to the Dow Jones Stock Market Index

Companies / Corporate News Jun 02, 2009 - 05:55 PM GMT

By: Money_and_Markets

Companies

Best Financial Markets Analysis ArticleNilus Mattive writes: The bankruptcy of General Motors isn’t surprising … in fact, Martin repeatedly warned Money & Markets readers — for years — that it was coming.


Still, the effects of this bankruptcy will reach all corners of the U.S. economy.

Common stock holders will likely get wiped out.

More than 1,100 dealerships have already received notices that they will have to shut down. Another 1,500 are getting cut in the near future. That will severely impact many already-suffering local economies.

Meanwhile, thousands and thousands of autoworkers are losing their jobs. GM announced nine more plant closures and is idling three more.

Many Americans have had their faith in U.S. manufacturing and ingenuity shaken to the core.

And as perhaps the final symbol of GM’s utter failure, yesterday the company was removed from our nation’s most famous stock market index — the Dow Jones Industrial Average. Citigroup was also jettisoned at the same time.

But Cisco is replacing GM in the index; Travelers will take Citigroup’s place. And therein lies the comfort for me, the immutable principle that all investors would do well to remember …

Change Is Inevitable: Fresh Ideas Create New Industries and Investment Opportunities

A brief history of the Dow proves this.

Way back in 1884, Charles Dow and Edward Jones wanted to create a way to use stock prices to track the overall health of the U.S. economy.

Since Charles Dow and Edward Jones started their index, entire  industries have come and gone!
Since Charles Dow and Edward Jones started their index, entire industries have come and gone!

Since railroads were the symbol of the nation’s emerging industrialism, they put together a list of stocks that included nine railroad firms and two other transportation companies. They took the average of the stock prices, and decided to track the resulting number up and down in their “Customer’s Afternoon Letter.” The index became what we now know as the Dow Jones Transportation Average (and the letter became The Wall Street Journal).

Twelve years later, Dow released his Industrial Average, which consisted of 12 important companies that sold cotton oil, sugar, leather, rubber and other products.

Today, the Dow Jones Industrials has grown to a list of 30 companies, and while not all of them are involved in traditional industrial activities, they are all major bellwethers for the U.S. business climate. Each and every company is a name that you know, with products that you’ve very likely used.

Consider Microsoft or Intel, both of which were added to the index back in 1999. Charles Dow could have never imagined the idea of a graphical user interface or a microchip processor.

Now Cisco, another tech titan, is joining the index. And there were other possible Silicon Valley candidates, including Apple or even Google, the youngest of this who’s-who bunch.

There were also other solid non-technology companies as viable candidates ranging from Toyota to Walgreens.

I can’t even begin to fathom what the Dow will look like forty years from now. Some of the names will be the same. But there will certainly be a few that don’t even exist yet. Maybe they’ll be “green” companies. Maybe they’ll produce implantable computers. Nobody knows … and that’s my point!

Innovation won’t stop … trends will come and go … and there will always be money-making opportunities for investors who keep their fingers on the pulse.

Speaking of which, the idea of GM getting replaced in the Dow brings up an important idea that I want you to understand …

Cisco's shares will certainly  benefit from getting added to the Dow Jones Industrial Average!
Cisco’s shares will certainly benefit from getting added to the Dow Jones Industrial Average!

Stocks Often Pop When They Are Added to Major Indexes!

In and of themselves, indexes are simply lists of stocks that are carefully assembled to represent the general performance of a particular market.

When a company gets added to a prestigious index, it’s a sign that the firm has achieved a certain status in the minds of some important market watchers.

When Cisco and Travelers get added to the Dow, you can be sure they’ll bask in the media afterglow. All that attention can certainly get more investors to hop on the bandwagon, too!

But nowadays, and for an entirely different reason, a whole bunch of people MUST buy a company’s shares when they get added to a major index.

That’s because any mutual fund or exchange-traded fund that tracks the Dow will have to readjust its holdings to track the “new” constituent list.

Let me give you a quick refresher on these index funds. Instead of relying on active management — i.e. individual stock picking — index funds simply attempt to track the broad market’s movements.

While there’s some leeway in exactly how each fund accomplishes this task, most index fund managers will generally buy at least most of the stocks in the index. And in the case of a very short list — such as the Dow — they’ll likely buy them all.

We typically see the biggest “index pops” when changes are made to the S&P 500 index, simply because so much money is tied to it via funds (more than a trillion dollars last time I checked!).

But watch what happens on June 8 when these stocks ultimately join the Dow. I’m willing to bet you’ll see a nice one-day gain in its shares, too.

That should serve as a reminder to us all that there are always solid investment opportunities out there, and even as one former giant falls another company stands ready to take its place … in our economy and our portfolios.

Best wishes,

Nilus

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

Money and Markets Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules