On September 24, 2015, we said the following:
“The outperformance of stocks dropped from an index is not as unusual as it would seem. Typically, index managers tend to drop stocks that appear weak in price performance and going through a transition to resolve the internal issues contributing to their weakness. At the same time, stocks that are added to an index just coming off a period of exceptional growth and are about to experience a readjustment period resulting in a decline in their stock price. The result is stocks being added to the index will adjust lower in price while the timing of the companies dropped from the index coincides with a resurgence in earnings surprises and increased stock price.”
So far the conundrum continues as more than one year later the addition of Apple (AAPL) to the Dow Jones Industrial Average has resulted in a decline of –24%. At the same time, the stock that Apple replaced, AT&T (T), has increased by +16%.
