The two historical patterns are as follows:
The Dow Jones is making some changes. Amazon (NASDAQ:AMZN) is stepping in for Walgreens (NASDAQ:WBA), and Uber (NYSE:UBER) is taking over from JetBlue (NASDAQ:JBLU).
Walgreens is getting the boot due to its poor profitability, plummeting by -58.22% since joining the index. In contrast, Amazon has soared by +178,602% since its stock market debut and inclusion in the index.
There’s a common belief that entering an index benefits stocks, while exiting harms them. The logic is that when a stock enters a major index, passive management funds replicating the index must buy its shares to maintain accurate performance replication. Conversely, when a stock exits, funds are no longer obligated to hold its shares.
However, this belief isn’t always proven right. For instance, the last time the Dow Jones saw changes was almost four years ago, with Salesforce (NYSE:CRM) replacing Exxon Mobil (NYSE:XOM). Since then, Exxon Mobil shares have seen an annualized return of +36%, compared to +9% for Salesforce.
Examining a study by Jeremy Siegel and Jeremy Schwartz, companies exiting the S&P 500 (1957-2003) outperformed, on average, the companies that entered the index. Similar trends were observed with stocks exiting the Russell 2000 (1979-2004) compared to those entering.
In reality, the logic behind index changes doesn’t always hold. So, we should be cautious about assuming this rule always applies.
Wall Street has a list of stocks that could lift the Dow Jones this year.
Here are the stocks that would contribute the most to the rise of the Dow Jones this year along with the weightage in the index:
It took more than three decades, but the Nikkei 225 finally managed to set all-time highs and break above the record highs set back in December 1989. The index breached the 40,000 point mark for the first time ever.
Note that at its peak in 1989, Japan had a CAPE index of 78, making it a bubble, compared to a CAPE of 18 for the U.S. stock market at the time.
Months ago, Warren Buffett already expressed his interest in the Japanese stock market as he increased his stake by 5% in these five companies:
Here’s how the world’s major stock exchanges are ranking so far in 2024:
Bullish sentiment, i.e. expectations that stock prices will rise over the next six months, rose to 46.5% and remains above its historical average of 37.5%.
Bearish sentiment, i.e. expectations that stock prices will fall over the next six months, fell to 21.3% and remains below its historical average of 31%.
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Disclaimer: The author does not own any of these shares. This content, which is prepared for purely educational purposes, cannot be considered as investment advice.
This article was originally published here.
