Dow average changes its look; Microsoft, Intel, SBC, Home Depot replace stalwarts


Microsoft Corp., Intel Corp., SBC Communications Corp. and Home Depot Inc. will join the Dow Jones industrial average Monday -- bumping out such longtime stalwarts as Sears, Roebuck & Co. -- as the nation's oldest stock-market index embraces the "New Economy" of America.

Leaving the Dow will be, in addition to Sears, chemical maker Union Carbide Corp., Goodyear Tire & Rubber Co. and Chevron Corp., a major petroleum refiner.

The selection of Intel and Microsoft, both of which trade on the Nasdaq, marks the first time the Dow industrials have included companies not listed on the New York Stock Exchange, scratching a long-standing tradition that kept some of the most dynamic names in technology and the overall economy from being reflected in Wall Street's best-known barometer.

The 30-stock Dow isn't the only index of stock performance: There's also the broad S&P; 500 and the Nasdaq composite, an index of fast-growing companies dominated by digital-technology and biotechnology firms. But it's the 103-year-old Dow that's regarded as the "blue chip" stock index and is the one that the typical consumer follows. By adding technology leaders Microsoft and Intel, and a telecommunications firm such as San Antonio-based SBC, formerly Southwestern Bell, the keepers of the Dow index are acknowledging the growing importance of technology and telecommunications to the global economy.

"The old industrial economy and the new economy are being transposed," said Peter Schwartz, chairman of the Global Business Network consulting firm and author of "The Long Boom: A Vision for the Coming Age of Prosperity." "This is a clear case of that occurring."

Adjusting the Dow falls to the editors of the Wall Street Journal newspaper, owned by Dow Jones & Co., which also owns the Dow Jones industrial, utility and transportation averages.

Paul E. Steiger, the Journal's managing editor, said "the changes we are announcing today will make the Dow Jones industrial average even more representative of the evolving U.S. economy."

Inserting Microsoft, the world's biggest software company, and Intel, the No. 1 chip maker, into the Dow essentially puts the blue-chip seal of approval on both since the two stocks, already popular with investors, are likely to be even more closely watched by mainstream consumers.

Since its founding in 1896 as a 12-stock index, the Dow has grown with the economy and changed its face as the U.S. economy diversified away from smokestack industry, into a service-based economy, and now to one based on technology and technological know-how.

The only company of the original twelve on the Dow is General Electric Corp. But even GE was dropped in 1898, only to be reinstated in 1907.

With a market worth of $475 billion, Redmond, Wash.-based Microsoft is the most valuable company in the world. In light of that, "having it in the Dow is totally appropriate," said John R. Dorfman, a columnist and president of Dorfman Investments LLC, a Boston-based money manager.

Santa Clara, Calif.-based Intel Corp., with a market value of $246 billion, is the third-most valuable. General Electric separates the two at $412 billion.

Adding technology companies to the Dow -- particularly those listed on the fast-growing Nasdaq index -- was the correct move to make, a Legg Mason market-watcher said. The reason: Technology comprises an increasing percentage of the nation's economy -- about a third, as measured by the 500-stock S&P; index, said Richard Cripps, the chief market strategist at Legg Mason Wood Walker Inc. in Baltimore.

Microsoft, Intel and SBC "are a solid representation of the technology and telecommunications companies that are driving the economy," Cripps said.

Such companies are one reason that the technology-focused Nasdaq is up 28.5 percent this year, compared with 13.7 percent for the Dow. Over the past 12 months, the Nasdaq has soared 63.5 percent, compared with 24.2 percent for the Dow.

Even Atlanta-based Home Depot is more a representative of the "New Economy" than it is an old-fashioned retail chain. Home Depot is part of a new breed of retailers, known as "category killers," for the dominance of their niches. And the company has said it will take its game plan for dominating the home building-and-remodeling business into cyberspace as an e-commerce player.

The companies leaving the Dow are all longtime denizens of the index. Sears joined in 1924, Union Carbide in 1928, and both Goodyear and Chevron in 1930 (though Chevron did an earlier stint in 1924-1925).

Of the stocks added to the Dow list, Home Depot slid $1.25 yesterday to $70.6875; Microsoft dipped 6.25 cents to $92.375; Intel rose 12.5 cents to $71.375; and SBC climbed $1.3125 to $45.5625.

All of the stocks leaving the Dow fell. Chevron dropped $2 to $88; Goodyear fell $3.9375 to $41.25; Sears dropped $1.875 to $27; and Union Carbide slipped 50 cents to $59.

The downside to adding faster-growing companies to the index is that the Dow will become much more volatile than it was with Goodyear, Chevron, Union Carbide and Sears, says Legg Mason's Cripps.

According to Cripps, the Dow swings of 100 points investors become oblivious to today could easily climb to 200 or 250 points -- and it's not clear how investors will react to that.

From a historical standpoint, the Dow also will be less useful as a tool of comparison, since the new Dow will include so many technology companies, said Dorfman, the money manager and columnist. Technology stocks tend to trade at premiums that far exceed what many academic researchers feel they're worth -- or is safe, from an investment standpoint.

But, then, quipped Dorfman: "Can you really measure anything -- even the weather -- over a 100-year period without changes in something related to the way you measure it?"

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