The Wall Street Journal-20080212-Ahead of the Tape

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Ahead of the Tape

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Dow Changes

Reflect Volatility

In the Economy

The Dow Jones Industrial Average looks more exposed to the ups and downs of the economy.

With a maker of consumer staples and an exporting manufacturer out of the index as of Feb. 19, and an energy and financial company added, the blue chip average is more heavily weighted toward two industries in the heat of the business cycle. The average -- produced by Dow Jones, publisher of The Wall Street Journal -- is meant to reflect the broader economy, so the volatility one gets with energy and financials might be just what investors have in order these days.

In effect, investors who bet on the Dow industrials through exchange-traded funds and other vehicles also have more riding on a recovery. Bank of America is not a bad company on which to make that bet. It hasn't suffered nearly as much as its rival, Dow component Citigroup, from subprime investments gone bad. But a recession and recovery would swing Bank of America's bottom line nonetheless.

With the moves, the Dow's exposure to financials rises to 13.9% from 11%, according to numbers crunched by Bespoke Investment Group. By adding Chevron, the average will be 10.8% exposed to energy, up from 5.5%. Its consumer-staples exposure will fall to 11.6% from 16.4%.

By losing Honeywell International -- the Dow's best performer last year -- the industrial sector's importance to the index will fall to 22% from 26%. That is still higher than the sector's share of the broader economy. And the Dow will lose just a little bit of the benefit of any strength in exports (though it will still have plenty).

The effect of these moves won't be enormous, but they do move the average closer to mirroring the broader economy. Financials made up 38% of corporate profits in the third quarter of last year, far bigger than their share of the Dow industrials. The average is still less tied to the banking and oil sectors than the Standard & Poor's 500, the market cap of which is 17.9% financials and 12.45% energy.

Dow Component GM

Seems on a Downslope

One former Dow star has fallen on hard times. General Motors was the best-performing stock in the Dow in 2006 and motored higher into early October. But it has dropped nearly 36% since then.

GM's fourth-quarter earnings report today isn't likely to rekindle the shares. Analysts surveyed by Thomson Financial expect GM to report a loss of 54 cents a share.

Sales of high-margin sports-utility vehicles and trucks have been dropping. High material costs are eroding profit margins. And GM is juggling woes at Residential Capital, a subprime-addled mortgage business, in which it has a 49% stake.

One new area to look for: Spending by wealthier consumers on high- end rides such as GM's Cadillac CTS and Escalade. They've been sources of strength, but cracks are showing. Sales of luxury autos by BMW, Ferrari, Lexus, Jaguar and Porsche slid in January. Meantime, confidence of high-end consumers is softening.

Nearly 60% of consumers with annual incomes of $75,000 or more said they didn't plan to increase their spending in February from January, according to the Discover Card U.S. Spending Monitor, a monthly telephone survey of 15,000 adults. That was up from 45% the previous month.

-- Scott Patterson

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