As oil prices surge, the Dow is missing ExxonMobil: Morning Brief

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Thursday, June 9, 2022

Today’s newsletter is by Jared Blikre, a reporter focused on the markets on Yahoo Finance. Follow him on Twitter @SPYJared.

ExxonMobil (XOM) surged to its first new high in eight years on Wednesday.

Unfortunately, the Dow Jones Industrial Average (^DJI) isn’t benefiting from the oil major’s 70% gain this year.

And neither are the investors in the nearly $2 trillion in ETFs alone that are tied to the performance of the Blue Chip index.

The Dow — which is the world’s oldest actively managed index — kicked out ExxonMobil nearly two years ago, along with Pfizer (PFE) and Raytheon Technologies (RTX). The Dow committee’s August 2020 move was the biggest reshuffle since Apple (AAPL) replaced AT&T (T) back in 2015.

In the place of XOM, RTX and PFE, index manager S&P Global popped in Salesforce.com (CRM), Amgen (AMGN), and Honeywell (HON).

The problem? Only Honeywell stock has made a profit for investors — gaining 16% — since that switch out. In 2022, Salesforce has sunk 26% and Honeywell has dropped 7%. It comes as little consolation for the index that Amgen shares are up 9% this year.

Meanwhile, XOM has gained 157% since being booted, and up 781% this year alone.

Since being removed from the Dow, Raytheon shares are up 59% while Pfizer has gained 49%. These stocks are up 15% and down 9% this year, respectively.

Put it all together, and the Dow would have been better off had the index managers simply sat on their hands.

Since that fateful final trading day in August 2020, the Dow has netted 14.9%, but the index is down 9.4% this year. Had it been left alone, the Dow would have bested its current performance by 5.6% percentage points over the stretch, and 1.6% this year.

Moreover, because of the archaic price-weighted methodology the Dow uses, the outperformance would have been even greater were the index market-cap weighted.

The difference in performance is material — especially when taking into account the effects of compounding growth.

This blunder also highlights a problem faced by fund managers and regular investors alike. Major reallocations are often made during times of market turmoil ,when the next big market theme is a mystery.

Oil stocks, for instance, have been caught up in the market’s move to value, a trade that was really unleashed after the results of the November 2020 election.

Of course, we shouldn’t be too hard on S&P Global — in April, 2020, WTI crude oil futures traded down to an unfathomable negative $40 per barrel.

Exxon shares were cut in half in just a few months at the start of 2020 as the stock traded all the way down to $30 per share — a far cry from its 2014 record high just north of $100.

And things could’ve been even worse for the Dow’s move away from energy, as the index maintained Chevron’s (CVX) membership, and shares of the oil giant have returned 112% since Exxon’s exit.

What to Watch Today

Economy

  • Initial Jobless Claims, week ended June 4 (200,000 during prior week)

  • Continuing Claims, week ended May 28 (1.309 million during prior week)

  • Household Change in Net Worth, Q1

Earnings

Pre-market

  • No notable reports scheduled for release.

Post-market

  • DocuSign (DOCU) is expected to report adjusted earnings of 46 cents per share on revenue of $581.78 million

  • Stitch Fix (SFIX) is expected to report adjusted losses of 53 cents per share on revenue of $492.71 million

  • Rent the Runway (RENT) is expected to report adjusted losses of 73 cents per share on revenue of $64.15 million

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