General Electric Goes Off The Grid
/A 122-year run comes to an end.
General Electric (GE), an original member of the Dow Jones Industrial Average dating back to 1896, was removed from the index and replaced with Walgreens Boots Alliance (a holding company that owns Walgreens). This is a pretty big deal considering GE's tenure as a member of the Dow and the fact that only 51 changes have ever been made to the Dow index. GE business has struggled in recent years, cutting its dividend back in November as it also considers dividing up its various business segments.
What is "The Dow"? The Dow Jones Industrial Average is an index comprised of 30 large, U.S. based companies. It is a price-based index, so those companies with higher share prices have greater influence on changes to the overall index value. For instance, Boeing at $340/share (biggest company) has nearly 10 times more influence than Pfizer (smallest company) at $36/share.
The Industrial part of the index's name is misleading though. The Dow does not attempt to specifically track the Industrials sector. In fact, there are only 5 Industrial stocks among the 30 companies in the index.
How does the Dow differ from the S&P 500? In contrast, the S&P 500 is market-capitalization weighted, which is calculated by taking each member company's share price and multiplying it by their number of shares outstanding. This more accurately reflects a company's size than the price-per-share does and it ensures that the truly larger companies among the 500 members have greater influence on the overall index value. The S&P is more diluted than the Dow, given it has 16 times the number of companies, but its market cap approach still makes it a better reflection of the U.S. market, in my opinion.
"Do not catch a falling knife." As the price of GE shares has fallen nearly -60% from where it was just two years ago, this teaches a valuable lesson. In a perfect world we would always buy low and sell high, but attempting to nail the bottom is most often a foolish approach. In order to buy low, especially when looking at GE, how do we know when that is? Take a look at its precipitous fall over the past couple years:
(chart created in stockcharts.com)
This is where the phrase "trying to catch a falling knife" comes into play. Much like trying to catch a knife and avoid injury, attempting to buy a falling stock or fund is a very risky proposition. A number of you have asked about whether we would buy GE over the past year and my answer has been "no". At least not yet.
My reluctance is due in part to the risk of trying to catch this falling knife, but it also has to do with opportunity cost. Even if GE does not fall too much further before it eventually bottoms, the time it takes for that to run its course and then begin moving higher (assuming it does) could take months or even years. Is that the best decision relative to other available investments? I don't believe so.
If the share price has a falling trend, it will likely continue to fall. Even if we suppose that the price has already bottomed, it could move sideways for a long time before actually rising.
In The Market..
The S&P 500 fell -0.9% this past week. Let's look under the hood:
(price data via stockcharts.com)
This week's loss for the S&P index broke what was a quiet four-week winning streak. I say quiet because the S&P only gained a combined +1.6% over those four weeks.
At the sector level it was mostly about defense, as Utilities, Real Estate and Consumer Staples finished positive. It was a rough week for growth with Technology, Financials, Materials and Industrials all losing more than -1%.
To that end, our Materials position (XLB) has yet to materialize as we anticipated (no pun intended). Materials did rebound somewhat on Friday, but we need to see more of that into this coming week. Something we are monitoring. We added a Health Care sector fund (XLV) to our larger or more aggressive accounts. Health Care looks like a sector that is primed to rally.
In Our Portfolios...
What's New With Us?
The long-awaited Dept of Labor Fiduciary Rule is dead, officially struck down by the U.S. Fifth Circuit Court of Appeals. This law was aimed to force traditional stock brokerage firms to adhere to a fiduciary standard of looking out for their clients' best interests, rather than the current, watered-down suitability standard. The current suitability standard meant that these financial advisers (not us) only had to meet the bare minimum requirement when making investment recommendations or managing money for their clients.
The analogy I like to use when differentiating between the suitability standard and the fiduciary standard is this...
"That shirt fits you." (suitability standard)
"That shirt fits you and looks good on you." (fiduciary standard)
Our firm has always been held to the fiduciary standard by virtue of being a Registered Investment Adviser (RIA) firm. So while the reversal of the Fiduciary Rule is a big deal for our industry, it is not exactly for our firm. It was never going to affect us much. We made some refinements based on elements of the law, but nothing drastic.
For traditional brokers the regulatory landscape is back to square one. I have written at-length about why I thought the fiduciary rule was a net-positive for brokers and am happy to detail that again if you want me to. The reversal of this law is a massive regulatory change for the investment management industry, even if it means little to us. It will now take years before such regulations are implemented, if ever.
Have a great week,
Brian E. Betz, CFP®
Principal