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As Nasdaq Challenges the Dow, It's Time for an Index Make-Over

March 05, 2000|TOM PETRUNO

Dateline: New York, July 8, 2001--The Nasdaq composite stock index crossed the 10,000 mark today for the first time, extending the phenomenal technology rally that began in late 1999.

Meanwhile, the beleaguered Dow Jones industrial average slipped 45.61 points to end at 9,905.66. . . .


The Nasdaq index over 10,000, and the Dow under 10,000? Dow Jones & Co., the guardian of the world's best-known stock index, would probably like us all to believe that it wouldn't be a big deal if it happens.

Right. And Coca-Cola wouldn't care if Pepsi overtook it as the world's best-known soft drink.

Take a tip, Dow Jones: It's time for a radical Dow make-over.

In the 100-year history of the Dow index, Wall Street has periodically argued over its relevance. But perhaps never before has the Dow been so at risk of appearing obsolete. On any given day this year, the question many investors have asked is not "What's the Dow doing?" but "What's the Nasdaq doing?"

Powered by the technology, telecom and biotech shares that dominate it, the 4,700-stock Nasdaq composite index roared up 86% last year and is up almost 21% this year, to a record 4,914.79 as of Friday.

The Dow, saddled with too many names that investors rightly or wrongly now view as "old economy," is down nearly 10% so far this year, even after Friday's 202.28-point rebound to 10,367.20.

If Nasdaq passes 5,000 this week, as appears quite likely, the what's-wrong-with-the-Dow? stories will be everywhere.

Is there really something wrong with the index? Dow Jones insists it has always strived to keep the Dow representative of a cross-section of major American industries. The member stocks have changed as the economy has changed.

To its credit, Dow Jones made a major substitution last November, adding Intel, Microsoft, SBC Communications and Home Depot, while booting Chevron, Goodyear, Sears and Union Carbide.

So now the 30-stock Dow includes four major technology stocks (Intel, Microsoft, Hewlett-Packard and IBM).

You can almost hear the laughter over at Nasdaq. Technology is just 13% of the Dow? Even on a share-price-weighted basis (that's how the Dow is calculated--its highest-priced stocks matter most in determining its moves) those four pure tech stocks account for just 22% of the index.

By contrast, tech stocks in the Standard & Poor's 500, the broader blue-chip stock gauge, now account for 34% of the index's value.

Of course, some people say the tech-stock sector is a massive bubble bound to burst. Adding more tech to the Dow now would make it more vulnerable to a sharp decline, they say.

Fine--then the index would at least be a truer reflection of what's happening in what is arguably the most important part of the market, and economy, today.

Whatever happens next with tech stocks, does anyone really believe that technology as an industry is going to be less significant to America's economic advancement in three, five or 10 years?

Despite Dow Jones' changes to the Dow index since 1990--it has substituted 11 of the 30 stocks since then--change simply isn't coming fast enough.

The oil industry has been fading in importance to the U.S. economy since 1980, but Dow Jones kept three oil stocks in the Dow until 1997.

Wal-Mart, the largest U.S. retailer, finally got a Dow slot in 1997, taking the place of Woolworth (now Venator). Why was that move so long in coming?

And with regard to tech, Dow Jones probably would prefer not to be reminded that it kicked IBM out in its early days, and added the stock back to the index only in 1979--missing most of IBM's glory days.

Dow Jones respects tradition. But there is nothing traditional about the pace of change in the economy anymore, and in particular the speed with which the Internet is transforming the way we live, and how business is done.

Likewise, Dow Jones has always preferred to wait for companies to become established before considering them for the Dow index. But it seems inevitable now that corporate life cycles are going to be shorter, and that new industry leaders will arise much faster. Why shouldn't the "premier" U.S. stock index reflect those realities?

Here's a modest proposal: With just five substitutions, the Dow could become far more representative of the new economy. These five substitutions would mean pure tech and telecom stocks would make up about one-third of the 30-stock roster. That would still leave two-thirds of the index in other industry sectors Dow Jones deems important.


Here are my five nominations for Dow membership:

* Cisco Systems. One can only hope this name is at the top of Dow Jones' own list of possibilities. The premier computer networker, with $12 billion in sales last year, Cisco is building the backbone of the Internet worldwide--which is why its market capitalization (stock price times number of shares outstanding) is $470 billion, more than any company other than Microsoft.

If any tech stock belongs in the Dow, Cisco does.

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