How the last Dow Jones Industrials reshuffle (unintentionally) heralded the return of Big Oil

“The results of the latest quarterly reshuffle of the FTSE 100 become final as of the close on Wednesday but it is eighteen months since the last changes to the membership of America’s 30-stock Dow Jones Industrials and the results of that shift are nothing less than spectacular,” says AJ Bell Investment Director Russ Mould. “On 31 August 2020, pharmaceutical giant Pfizer, defence contractor Raytheon and oil major ExxonMobil were ejected from the Dow and replaced by software firm Salesforce.com, industrial technology specialist Honeywell and biotech behemoth Amgen, amid much crowing about how the changes reflected major shifts in the global economy, with big oil in particular seen as the big loser. The result? All three of the new entrants have underperformed those that left the index and ExxonMobil has been the best of the lot.

“Over the past 18 months, ExxonMobil is up by 95%, enough to rank it 58th in the S&P500 benchmark. Saleforce.com is down 25%to leave it 493rd, despite all of the excitement at the time about how tech stocks were dominating, and oil stocks looked doomed.

“There can surely be no finer example of how the best investments are made when you put your money where no-one else is. Following the herd just got investors into trouble.

Source: Refinitiv data

“Salesforce.com is the single worst performer in the Dow since the time of its inclusion and Amgen the third worst. By contrast, another oil major, Chevron is the third best performer over the past 18 months.

Source: Refinitiv data

“In fact, the index compilers might as well have rung a bell and told investors to pile into energy and commodity stocks – even if the message they thought they were giving was presumably intended to be the direct opposite of that.

“Since ExxonMobil’s ejection from the Dow, those sectors have dominated the broader S&P 500, while technology and healthcare have started to languish, weighed down by lofty expectations, even loftier valuations and the shift from secular growth, jam-tomorrow stocks to cyclical growth, jam-today companies as the global economy continues to shake off the effects of the pandemic, inflation creeps higher and interest rates start to rise.

Source: Refinitiv data