Tech Giants Microsoft, Intel Joining Dow Index

By THOMAS S. MULLIGAN

Oct. 27, 1999 12 AM PT

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TIMES STAFF WRITER

NEW YORK — In a move that acknowledges the soaring importance of technology in the U.S. economy and the stock market, Microsoft Inc. and Intel Corp. are being added to the Dow Jones industrial average.

Also joining the world’s best known stock index, effective Monday, will be phone giant SBC Communications and retailer Home Depot.

The newcomers will replace three “smokestack” stocks--Chevron, Goodyear Tire & Rubber and Union Carbide--plus old-line retailer Sears, Roebuck & Co. in the 30-stock index.

The dramatic changes by Dow Jones & Co., publisher of the Wall Street Journal, mark the latest attempt to keep the 103-year-old Dow in touch with the massive shift in the U.S. economy away from heavy manufacturing and toward technology and services.

By adding Intel and Microsoft--the first Dow members from the electronic Nasdaq Stock Market--Dow Jones is doing something that many critics say should have been done five or 10 years ago.

“The Dow was becoming a useless gauge” in terms of evaluating the leading edge of the market, argued Anthony Dwyer, chief market strategist at Kirlin Securities in New York.

Had the two tech giants been in the Dow at the outset of the 1990s, the index would be far above its current level of 10,302. Microsoft and Intel have notched 10-year price gains of 7,395% and 3,346%, respectively, while the Dow has risen 275%.

But the addition of those leading tech stocks also will make the index more volatile, because of the quirky way in which it is calculated, and because technology stocks are inherently more volatile.

Not surprisingly, some analysts wondered if Dow Jones’ capitulation on Microsoft and Intel would turn out to mark a peak for the red-hot tech sector.

“The Dow has been fairly stable over time with industrial companies, but we think it’s extraordinarily risky to put in Microsoft and Intel now at essentially the top of the technology cycle,” said Dallas money manager David W. Tice, a longtime stock market pessimist.

But others noted that if Dow Jones intended to keep its index’s status as the premier U.S. market gauge in the 21st century, the changes were inevitable--particularly the inclusion of Microsoft, which is not just the No. 1 software maker but the world’s largest company in terms of stock market value.

“The new bricks-and-mortar is software,” said Elizabeth MacKay, chief strategist at brokerage Bear Stearns Cos. in New York.

After the changes, 19 of the 30 Dow components--or 63%--will represent service industries, including financial services, technology and consumer products, MacKay noted, adding that service industries now make up almost exactly the same proportion of the U.S. economy.

The index is maintained by top editors of the Wall Street Journal.

“Microsoft and Intel certainly belong in the average,” Journal Managing Editor Paul E. Steiger said in an interview Tuesday. “They are huge and they represent industries that are playing an increasingly important role in the U.S. economy. Sure, we could have put them in earlier, but I’m glad we’re putting them in now.”

Steiger acknowledged that the new additions will probably make the index more volatile, but said, “You accept the volatility as a consequence of getting a closer approximation of the economy.”

The changes stemmed from a Dow Jones review conducted over the last few months and were prompted in part by the pending takeover of Union Carbide.

To many Americans, the Dow is synonymous with “the market.” Professional investors, however, tend to rely on broader barometers such as the Standard & Poor’s 500-stock index.

About $700 billion is invested in mutual funds designed to mimic the performance of the S&P;, as compared with only $165 million in index funds that track the Dow.

Still, because of its visibility, the Dow’s moves can have a major impact on investor psychology, analysts noted.

For Nasdaq, the inclusion of two of its flagship stocks--Microsoft and Intel--is a coup that officials in that prestige-hungry market believed was overdue. All previous Dow members have been traded on Nasdaq’s archrival, the New York Stock Exchange.

“The inclusion of these two Nasdaq companies makes the Dow more reflective of today’s global economy,” Frank G. Zarb, chairman of the National Assn. of Securities Dealers, Nasdaq’s parent, said in a statement Tuesday.

NYSE Chairman Richard Grasso, who by coincidence was visiting Zarb at Nasdaq’s New York market center when the Dow announcement was made, had no comment.

Changes to the Dow are infrequent. When established by Charles H. Dow in 1896, the index contained 12 stocks, including General Electric--the only stock to remain in the index for its entire history.

The last revision was in March 1997, when Hewlett-Packard, Wal-Mart Stores, Johnson & Johnson and Travelers Group (now Citigroup) were added, and Westinghouse, Texaco, Bethlehem Steel and Woolworth were removed.

In Sears, the Dow is banishing its second-oldest continuing member after General Electric. Sears was added to the average in 1924.

The Chicago-based retailer reacted bitterly to the suggestion that its exclusion would make the index more representative of the economy.

“With more than $40 billion in revenues, 300,000 employees and relationships with 65 million households, Sears most certainly plays a relevant role in the U.S. economy,” Sears said in a statement.

Hurt feelings aside, analysts said the substitution of Home Depot for Sears accurately reflects consumers’ preference for the discount warehouse over the traditional department store.

In NYSE trading Tuesday, shares of the four stocks being replaced all fell. Goodyear fell $3.94 to $41.25, Chevron dropped $2 to $88, Sears lost $1.88 to $27, and Union Carbide fell 50 cents to $59.

The newcomers were mixed, with Home Depot dropping $1.25 to $70.69, Microsoft falling 6 cents to $92.38, SBC (which owns Pacific Bell) gaining $1.31 to $45.56 and Intel rising 19 cents to $71.44.

Sears and the other departing firms might be comforted to know that there is precedent for rejoining the Dow.

Primerica Chairman Sanford I. Weill “nearly drove off the road” in 1991 when he was told by cell phone that the big financial-services firm was being removed from the index, Steiger recalled Tuesday.

But the company, now Citigroup--the nation’s largest banking firm--was added back to the index six years later.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

WHAT”S IN

*--*

Pct. gain

Stock since 1989

Microsoft +7,395

Intel +3,346

Home Depot +2,429

SBC Comm. +220

*--*

WHATS OUT