Potential for Amazon’s Stock to Underperform Walgreens’ due to Dow Jinx in 2021
The Dow Jones Industrial Average (DJIA), a renowned stock-market barometer, is known for its secretive construction and the influence each stock has on its performance. However, there is also a phenomenon known as the “Dow jinx,” where new members tend to underperform the members they replaced. This raises the question of whether Amazon’s stock will underperform Walgreens’ due to the recent changes in the DJIA.
Unlike other market trackers, the DJIA calculates its price based on dollar-amount changes in the components’ stocks rather than market capitalization. This means that stocks with higher prices have a greater influence on the index’s price. As of now, the divisor, which determines the effect of a stock’s price change on the Dow, stands at 0.15172752595384. With the upcoming stock split of Walmart Inc., the divisor will increase slightly to 0.15265312230608.
On Monday, Amazon.com Inc.’s stock will join the Dow, becoming the third-largest company by market capitalization but ranking 17th out of 30 by price. A 1% change in Amazon’s stock would move the Dow by 11.5 points, while a 1% move in UnitedHealth Group Inc.’s stock, the highest-priced stock in the Dow, would move the index by about 35.5 points.
The recent changes in the DJIA were made to increase exposure to consumer retail and other business areas. The correlation coefficient between Walgreens Boots Alliance Inc.’s stock and the Dow was negative, indicating a negative correlation with the market. On the other hand, Amazon’s stock showed a positive correlation with both the Dow and the S&P 500.
Despite the reputation of the Dow jinx, it is important to note that the Dow keepers’ mission is to match the market rather than pick winners. Over the long term, they have been successful in achieving a high correlation with the S&P 500. However, historical data shows that stocks entering the Dow often underperform those that leave in the short term.
An example of this can be seen when Apple Inc.’s stock replaced AT&T Inc.’s stock in 2015. In the year before the swap, Apple’s stock soared 71%, while AT&T’s stock gained only 3.4%. However, one year after the change, Apple’s stock had dropped by about 18%, while AT&T’s had gained 16%.
Looking at the performance of Amazon and Walgreens over the past year, Amazon’s stock soared by about 83%, while Walgreens’ shares plunged by 40%. This raises the possibility that Walgreens’ stock may outperform Amazon’s in the near future.
It is worth mentioning that the Dow jinx does not always hold true. There have been instances where stocks entering the Dow outperformed those that were replaced. For example, Honeywell International Inc.’s shares rose by 38% in the year after entering the Dow, while RTX Corp.’s stock climbed by 36% in the year after exiting.
In conclusion, the recent changes in the DJIA have raised speculation about the potential underperformance of Amazon’s stock compared to Walgreens’. While historical data suggests that stocks entering the Dow often face short-term challenges, it is important to remember that the Dow keepers aim to match the market rather than pick winners. Only time will tell how these changes will impact the performance of these stocks.
