Viewpoint / July - 6 Meridian

Viewpoint / July Returns After Being Dropped From Dow

Chart of the Month Being dropped from an index can be bad news for a company. In addition to the perception of losing relevance in the economy, the drop means losing a coveted spot in index-tracking ETFs. This month one of the older indexes in existence - the Dow Jones Industrial Average - removed one of the older stocks in existence - General Electric (GE) - from its ranks. Looking back at the companies that have been dropped from the Dow over the past 30 years shows that it's not always bad. The following chart shows that stocks underperformed the Dow by 2.5% on average a month after being removed, but rebounded to perform in line with the index for the full year following removal. Perhaps the more important story is that hidden in this average is a wide dispersion between the names. The top half have gone on to do very well, outperforming by nearly 25% on average, while the bottom half have underperformed by 25%.

30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% -30%

1 21 41 61 81 101 121 141 161 181 201 221 241 Trading Days since Removal Top Half

Bottom Half

Average

Sources: S&P Dow Jones; Bloomberg

The Advisor Survey: Andrew Mies, CFA®, Chief Investment Officer In life we are taught that it is important to persevere in the face of challenges. This may be easier said than done. This is true in investing also. Value investing has shown to be an effective long term strategy, but that would be hard to see given the last 18 months. The Russell 1000 Value index has underperformed the Russell 1000 Growth index by over 20%, which is the worst stretch of underperformance since 2000. It would be tempting to abandon any strategy after a 20% relative drawdown and many investors do. It can be tempting to buy into something that looks great over the past six months even if it might not hold up under deeper scrutiny. Investors, managers, and even index funds can end up buying high and selling low as a result. In investing, as in life, it can be rewarding over the long term to stick to the plan during the difficult times.

Source: FactSet 2018

June

YTD

2017

Benchmark

Stocks

United States Intl Developed Emerging Markets

0.6% -1.2% -4.1%

2.6% -2.4% -6.5%

21.8% 25.6% 37.8%

S&P 500 MSCI EAFE MSCI Emerging Markets

Bonds

US Investment Grade Intl Investment Grade Global High Yield Emerging Markets $

-0.1% -0.7% -0.5% -0.7%

-1.6% -1.3% -2.5% -3.8%

3.5% 10.5% 10.4% 8.2%

Barclays Barclays Barclays Barclays

Other

Commodities Gold Oil

-3.5% -3.5% 10.7%

0.0% -3.8% 22.6%

1.7% 13.2% 12.5%

Bloomberg Commodity Gold New York Spot ($/oz) Crude Oil WTI/Global Spot NYMEX

US Aggregate Global Aggregate xUSD Global High Yield Emerging Markets USD Aggregate

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