How the Dow Moved Last Week
Since the Dow Jones Industrial Average is a price-weighted index -- unlike the S&P 500, which is an index weighted by companies' market capitalizations -- the stocks within the Dow that have higher share prices matter more than those with low prices. For example, if Visa's stock price changes by $1, it has much more of an effect on the Dow than if Cisco moved by the same amount, since Visa currently trades for more than $200 and Cisco goes for just over $20.
Visa is the most heavily weighted Dow component, currently representing 8.45% of the index, while Cisco is the lightest, representing 0.82% of the index. That means Visa is nearly more than 10 times as important to the Dow as Cisco, even though their market caps are comparable -- $132 billion for Visa and $108 billion for Cisco. The Dow was originally created, and still widely regarded, as an indication of how the U.S. economy is doing, but with its price-based weighting system, it's easy to see how the index fails to meet its intended goals.
Let's look at what the Dow's 30 stocks did this past week and how those moves affected the index. You'll see how much each company's share price changed during the week, and how those changes affected the Dow, based on a change of points.
|Stock||Price Change||Price Percentage Change||Percentage of Index||Change in Points|
International Business Machines
Johnson & Johnson
Procter & Gamble
Information from Yahoo! Finance and author's calculations.
There were a lot of big movers within the Dow this past week, as only six of the 30 components changed by less than 1%. With only four of the 30 components ending the week in the black, one would imagine that the Dow itself would have tumbled more than 1.65%. But Visa rose 2.72% and pulled the index higher by 35.25 points last week.
That 2.72% rise erased declines of 1.96% for AT&T, 4.88% for Cisco, 1.79% for DuPont, 0.35% for ExxonMobil, 1.04% for Home Depot, 2.13% for Intel, and 2.04% for Merck. One stock wiped out the declines of seven other companies. That was fine this week, but the opposite can happen, too: Sometimes one declining stock shreds the gains of a handful of other companies.
Things aren't always what they seem, and this week was a perfect example, with the blue-chip index performing worse than you may have been led to believe. This is why it's always good to take the moves of the major indexes with a grain of salt, just as you would an analyst's rating change. Besides, unless you own an index fund, what does it really matter what the Dow or S&P 500 does on a day-to-day basis?
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The article How the Dow Moved Last Week originally appeared on Fool.com.Fool contributor Matt Thalman owns shares of Home Depot, Microsoft, JPMorgan Chase, Walt Disney, Intel, and Johnson & Johnson. Check back Monday through Friday as Matt explains what caused the big winners and losers of the day, and every Saturday for a weekly recap. Follow Matt on Twitter: @mthalman5513. The Motley Fool recommends 3M, American Express, Chevron, Cisco Systems, Coca-Cola, Goldman Sachs, Home Depot, Intel, Johnson & Johnson, McDonald's, Nike, Procter & Gamble, UnitedHealth Group, Visa, and Walt Disney and owns shares of Coca-Cola, General Electric, Intel, IBM, Johnson & Johnson, JPMorgan Chase, McDonald's, Microsoft, Nike, Visa, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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