Markets are picking up a bit as Apple’s stock split leads to a new weighting of the Dow Jones and major indices continue to break records.
The Dow Jones Industrial Average, an index of major stocks used to track market performance, announced on Monday that it was replacing three of its components, including the oldest.
These are longtime oil giant Exxon Mobil, pharmaceutical maker Pfizer and defense firm Raytheon. Cloud software vendor Salesforce, biopharmaceutical maker Amgen and maker Honeywell are in attendance.
“It’s out of the old and in the new,” said Andy Cross, chief investment officer at Motley Fool. “The Dow Jones is trying to stay more relevant.”
Technology, services and healthcare “are the source of most of the growth in the value of businesses and consumers over the coming decades,” he said.
The Dow Jones organization said in a statement that the move was prompted by Apple’s stock split, slated for Aug. 31, which would have reduced the index’s weighting in the information technology sector.
“The announced changes help offset this reduction,” he said in a statement. “They also help diversify the index by removing overlaps between companies of the same size and adding new types of companies that better reflect the US economy. “
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Exxon’s phase-out comes amid a global oil slump as demand plummeted during a recession linked to pandemic lockdowns. Following its deletion, Chevron will be the only oil and gas company to remain in the index.
Financial experts said the changes to the index reflected more how the Dow Jones is calculated than the overall structure of the economy.
“The Dow Jones Industrial Average is a price-weighted index, so stocks with higher stock prices have more influence on the movement of the index,” said Greg McBride, chief financial analyst at Bankrate.com . Apple had been the highest value in the Dow Jones.
“With Apple dividing 4 to 1, some adjustments were needed so that the influence of the information technology sector on the Dow Jones was not diminished,” McBride said.
Futures were up on Tuesday as China and U.S. governments said they had had a positive phone call overnight about the implementation of the phase one trade deal. Following the tariff escalation, the two countries announced an initial deal in January that called for a larger purchase of U.S. products, intellectual property protection, and access to Chinese markets, but the relationship were greatly strained in the following months under the coronavirus pandemic.
The Dow Jones rose 17 points and the S&P by 0.13% to 3,432 points. The S&P and Nasdaq set records on Tuesday, with the S&P hitting 3,400 for the first time, breaking levels set just the previous Friday.
Despite the impacts on coronavirus business, stocks last week recovered from the fastest bear market on record, defined as a 20% drop in values.
The new highs, driven by consumer discretionary stocks, illustrate the continued dislocation between Main Street and Wall Street as unemployment remains at all-time highs and declining relief funding accelerates the shutdowns of vulnerable small businesses.
Cross said the stock market was a “fortune teller” over the prospect of a potential coronavirus vaccine and signs of business recovery and better employment.
“The S&P is a relatively large-cap market, so it measures the performance of the largest public companies,” Cross said. “Much of the struggles and suffering that citizens feel comes from small and medium-sized businesses that need macro government support to help pay the bills during quarantines.”
Market fluctuations have also resulted in the closure of a record number of ETFs or exchange traded funds. ETFs are a collection of investments in particular sectors that track an underlying index, but the ETF itself is sold on the stock exchange like a stock.
A total of 188 have closed this year, according to FactSet.
Large companies cut funds that did not generate interest and market swings hammered ETFs that relied on leveraged bets to broaden their exposure to certain aspects of the market, particularly those on oil , gold and silver.
“This is as much a cleanup after nine months of insane volatility in the market,” and an oversaturation of opening new ETFs, Cross said.