Stock Market and Economy

StudentA:

The Dow Jones Industrial Average is an indicator of how 30 large U.S. companies are currently performing. Some of the companies included in the Dow are Apple, Coca-Cola, Exxon, McDonald’s, Procter and Gamble, and many more. There is no specific manner in which these companies are chosen, as they are not just the 30 largest companies in the market. Generally, they should be very large and well respected companies, and are chosen by S&P Dow Jones Indices.

The differences between the Dow Jones and the S&P 500 lie in their diversity and weighting methods. They are both well regarded indices, but are followed for different reasons. The Dow Jones is an average, calculated by a price divisor, so higher priced stock affect the average more than lower priced ones. The S&P 500 is of course far larger, containing 500 stocks, presenting a wider range of representation about the market. It is determined by giving weights to each stock by its market value, and regardless of stock price, a percentage change will be reflected the same on the index.

GE was recently removed from the Dow as it was under performing, going down around 55% over the past year. Because the Dow is weighted by price, this has a great impact on the Dow average, and this led to GE’s removal. This is certainly not good for GE and its stock, as its reputation is surely receiving negative pushback since its removal from the Dow reflects poorly on the company. The Dow however, is likely to recover as they have selected Walgreen’s to replace GE as its 30th company on the average. Walgreen’s was selected for its consistency, and will no doubt bring the Dow average back up.

Student B:

The Dow Jones Industrial Average is comprised of 30 companies that are thought to be representative of the overall economy. These stocks are chosen based on how well they reflect current economic conditions. They are very large companies and can be dropped from the Dow (like GE) if they experience financial distress or if the economy changes and would need to be reflected by different companies. The Dow is different from the S&P 500 Index because the Dow is price-weighted and S&P is market cap-weighted. S&P also has a larger number of companies and is therefore more diversified. A benefit of the Dow is that it shows the performance of large companies that have a large impact on the American economy. A disadvantage however, is that it is price-weighted, so the larger companies with affect the average far more than the smaller companies in the Dow. An advantage of the S&P 500 is that there are 500 companies, so it shows companies and stock conditions in every sector. However, because investors don’t only have stock and also have bonds and other investments, the S&P isn’t necessarily the best indicator of the overall economy. This is also a drawback of the Dow and any other stock index. From what I’ve found, the S&P 500 Index is now the leading index that people use to gauge the conditions of the stock market and economy.

In terms of GE, they were dropped from the Dow because their stock prices had very little impact on the Dow Average. Also, because the Dow is supposed to be representative of the overall economic conditions in the U.S, they can’t have a company that does not represent the economy. In the past year, GE has seen a 55% decrease in performance, which is not reflective of economic conditions. Considering that GE represented less than .4% of the Dow, I don’t think their absence will make a large impact itself. However, it is being replaced by Walgreens, whose share price is more than 5 times the amount of GE. This means that the Dow now has a company that will more significantly impact it. As far as the impact on GE, things have already been going downhill for them and I can only imagine being dropped from the Dow will not have a positive impact. However, because many investors are more reliant on the S&P 500, being dropped from the Dow may not have an extremely negative impact. There are many factors contributing to the downfall of GE, but depending on how the new CEO, John Flannery, decides to change operations, leaving the Dow could not matter at all.