Will GE Bow Out of the Dow and Should We Care?


General Electric (“GE”) has had a rough couple of months. GE started 2018 as “the most valuable publicly traded U.S. industrial conglomerate[.]”[1] Now, it is projected that GE could fall as low as the No. 4 spot, making it the least valuable of the four major industrial conglomerates.” The company’s stock price has dropped by nearly 25 percent over the past two months.[2] This devaluation trend has market watchers wondering if GE’s days on the Dow Jones Industrial Average are numbered.[3] If GE does get the boot from the Dow, what will that mean for GE, the Dow, and the financial system overall?

First calculated in 1896 and consisting of only twelve firms, the Dow Jones Industrial Average, (“DJIA”) commonly referred to as “the Dow,” is now an index of the thirty largest publicly traded companies.[4] For decades, the Dow has been used as a proxy for the general health of the American economy.[5] According to Adam Davidson, during “the postwar boom of the 1950s, the economy was growing so fast, and the benefits were so widely shared, that following 30 large American companies was a solid measure of most everyone’s personal economy.”[6] But the Dow’s effectiveness as a measure of economic health has waned: most financiers have ditched the Dow, preferring its younger cousin, the S&P 500.[7] As explained by Jamie Farmer, managing director of index investment strategy & data services at S&P Dow Jones Indices: “What happened in the marketplace, as the basis for investment vehicles, certainly the 500 is a more appropriate benchmark.”[8]

But the DJIA has booted GE not once, but twice over the average’s history, [9] so why is there so much consternation about GE’s possible third departure from the Dow?[10] The answer, it seems, has to do less with finance and more with history.

GE has been an American institution for over a century and, like many heritage firms, has had to weather the ups and downs of the financial system. “Shares of General Electric, already trading near an eight-year low, may take another hit as steel and aluminum prices rise because of President Donald Trump’s tariffs”[11] In the context of GE’s $10 billion fourth quarter loss, this news seems particularly troubling.[12] Deutsche Bank analyst John Inch predicts that GE’s days on the Dow are numbed.[13] Inch wrote in January,

“[w]e believe the chances that GE could be removed from the Dow are increasing as GE continues to face substantial challenges including earnings and cash pressure, tough global power generation markets, aggressive downsizing, shrinking its portfolio, management shake-up and SEC investigations. Apart from GE’s other challenges, as the company’s absolute share price has continued to drop, GE increasingly falls into the category of outlier and consequently a likely candidate for removal.”[14]

Some market-watchers speculate that if the Dow jettisons GE, Facebook will likely take its place.[15] “If I had to put my money on it, Facebook is on top of my list,” Richard Moroney, chief investment officer at Horizon Investment Services and the editor of the Dow Theory Forecasts newsletter told Bloomberg.[16] “GE has been floundering. They’d probably wait for GE to make an announcement of a divesture [sic], or breakup, or anything along these lines to give them an excuse to put it out.”[17]

GE’s possible ejection from the DJIA and Facebook’s ascension is more about history and metaphor than dollars and cents. The current President has gotten quite a bit of mileage decrying the loss of American manufacturing jobs over the past few decades.[18] When a century-and-a-quarter old manufacturer that traces its history back to Thomas Edison[19] is dropped from a historical, albeit relatively useless average and is supplanted by a tech company, one might read into the significance of the event. It can be viewed as metaphor for the changes in the economy: manufacturing is moribund while tech is thriving. For General Electric and the greater financial system, GE getting kicked out of the Dow is just another sign that they’re struggling; for the American people, it might be a sign of the changing times.

[1] Sai Sachin Ravikumar & Ankit Ajmera, GE Value Could Slip to Lowest Among Large U.S. Industrials, Reuters (Mar. 7, 2018, 9:11 AM), https://www.reuters.com/article/us-ge-stocks/ge-value-could-slip-to-lowest-among-large-u-s-industrials-idUSKCN1GJ20H.

[2] Ryan McQueeney, Why General Electric (GE) Stock Still Isn’t a Buy Right Now, Nasdaq, (Mar. 7, 2018, 6:30 PM), https://www.nasdaq.com/article/why-general-electric-ge-stock-still-isnt-a-buy-right-now-cm931612.

[3] Thomas Franck, GE Will Likely be Dropped from the Dow, Deutsche Bank Predicts, CNBC:  Trading Nation (Jan. 31, 2018, 4:54 PM), https://www.cnbc.com/2018/01/31/ge-will-likely-be-dropped-from-the-dow-deutsche-bank-predicts.html; See also, Lu Wang & Esha Dey, Facebook Is Waiting in the Wings Should the Dow Braintrust Get Sick of GE, Bloomberg (Jan. 19, 2018, 2:43 PM), https://www.bloomberg.com/news/articles/2018-01-19/facebook-waiting-in-wings-should-dow-braintrust-get-sick-of-ge.

[4] See Nicole Bullock & Eric Platt, Why Stock Trackers Flock to the S&P 500, Fin. Times (Sept. 11, 2015), https://www.ft.com/content/0875def6-4977-11e5-9b5d-89a026fda5c9.

[5] Adam Davidson, Why Do We Still Care About the Dow?, N.Y. Times (Feb. 8, 2012), http://www.nytimes.com/2012/02/12/magazine/dow-jones-problems.html.

[6] Id.

[7] Id.; See also, Bullock & Platt, supra note 5.

[8] Bullock & Platt, supra note 5.

[9] Steve Schaefer, The First 12 Dow Components: Where Are They Now?, Forbes (July 15, 2011, 11:44 AM), https://www.forbes.com/sites/steveschaefer/2011/07/15/the-first-12-dow-components-where-are-they-now/#16b4eebb0324.

[10] Wang & Dey, supra note 4.

[11] Thomas Franck, Ailing GE is Among the Stocks ‘Most at Risk’ to be Hurt from Trump’s Tariffs: Deutsche Bank, CNBC (Mar. 7, 2018, 9:17 AM), https://www.cnbc.com/2018/03/07/ge-among-the-stocks-most-at-risk-to-be-hurt-from-trumps-tariffs-deutsche-bank.html.

[12] Id.

[13] Thomas Franck, supra note 4.

[14] Id.

[15] Wang & Dey, supra note 4.

[16] Id.

[17] Id.

[18] Danielle Kurtzleben, Trade Is an Identity Issue, and Trump Knows It, NPR (Mar. 10, 2018, 7:00 AM), https://www.npr.org/2018/03/10/592450875/trade-is-an-identity-issue-and-trump-knows-it.

[19] Gen. Electric, Thomas Edison & The History of Electricity, (last visited Mar. 6, 2018), https://www.ge.com/about-us/history/thomas-edison.


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Fordham Journal of Corporate & Financial Law