Dow Jones Industrial Apple: Will the DJIA Slow AAPL's Roll?

Now that Apple Inc. (AAPL) is joining the Dow Jones Industrial Average (DJIA), the stock's meteoric rise could cool off

Mar 6, 2015 at 2:37 PM
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S&P Dow Jones Indices stole some BLS thunder on this Jobs Friday, when they announced this morning that Apple Inc. (NASDAQ:AAPL) will replace AT&T Inc. (NYSE:T) in its benchmark Dow Jones Industrial Average (DJIA) after the close of trading on Wednesday, March 18. While tech giant AAPL has often been touted as a likely candidate to join the Dow, the stock's stratospheric price was an automatic DQ --though that minor technicality was remedied by last June's 7-for-1 split.

Being added to a widely followed equity benchmark like the DJIA is often viewed as a positive for stocks, as portfolio managers are compelled to buy shares. Accordingly, AAPL is staying afloat amid today's sell-off, up 0.5% at $127.07. (By contrast, AT&T shares are down 1.5% -- and drawing attention from weekly option bears.)

Of course, that initial burst of buying pressure can't last forever, and we were curious to see how stocks have performed over longer time frames after joining the venerable old Dow. Below is a chart showing all of the new Dow Jones Industrial Average additions since 1990*, courtesy of Schaeffer's Senior Quantitative Analyst Rocky White (click to enlarge). Included are each stock's returns for the following one-, three-, six-, and 12-month periods, along with relative strength versus the DJIA during each time frame.

New Dow Jones Industrial Average Members since 1990

Or, if you prefer to keep it big-picture, here's a summary of all the data above. The average one-month return after being anointed a Dow member is negative 2%, with only 39% positive returns (and a larger average negative return than average positive). However, going out to a full year, the average return was 7.5%, with 65% positive returns. Speaking very broadly, then, it would seem getting added to the Dow is short-term negative, longer-term positive.

Stocks Since 1990 After Added to the Dow Jones Industrial Average

But how many of these returns are simply the products of their environments? In other words -- were these newcomers outperforming their peers after a year, or simply running with the rest of the Dow Jones pack? To find out, Rocky ran the relative-strength numbers for each stock to find out how the newest DJIA additions performed compared to the rest of the index. A relative strength of 1.000 means the return matched the Dow exactly; above that indicates outperformance, and readings below signal underperformance.

Based on this evidence, it seems that fresh Dow blood doesn't stay fresh for long. Looking over every time frame, the average and median relative-strength readings don't stray too far from 1.000. In fact, going out one year, fewer than half (47.8%) of stocks are outperforming the DJIA.

Relative Strength vs the Dow Jones Industrial Average

So, there's clearly no strong angle on stocks outperforming or underperforming after they join the Dow. Instead, it seems like these rookies toe the party line pretty staunchly, at least within the first year -- which means we may see AAPL shares tracking the movements of the broader Dow rather closely, for the time being.

Year-to-date, AAPL is up about 15%, while the DJIA has edged up 0.3%. Looking longer term, Apple Inc. (AAPL) shares are up nearly 68% over the past 52 weeks -- a period of time over which the Dow has muscled 8.7% higher. So will the DJIA slow AAPL's positive momentum, or will AAPL accelerate the DJIA's painstakingly slow progress? Well, let's just say that upcoming Apple Watch event might be a more high-profile market indicator than we thought ...

*Due to various mergers, acquisitions, and spin-offs, other analyses may show differing dates of DJIA entry for MDLZ (our proxy for the former Kraft Foods), C, and T.

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