Doing the Dow shuffle

Q.

I saw that Exxonmobil was removed from the Dow Jones Industrial Average. What happened? — G.V., Tulsa, Okla.

A.

Many don’t realize this, but the Dow Jones Industrial Average (“the Dow”) is an index of only 30 companies. Every few years, to better reflect our diversified economy, some components of the Dow are ejected to make room for new ones. The latest move replaces Exxonmobil, Pfizer and Raytheon Technologies with Amgen, Honeywell and Salesforce. These changes reduce the index’s exposure to energy and traditional pharmaceutical companies, while increasing representation of technology and biotechnology.

In 2018, General Electric was shown the door to make way for Walgreens Boots Alliance, while Apple replaced AT&T in the index in 2015. The last major shakeup occurred in 2013, when Alcoa, Bank of America and Hewlett-packard departed, making room for Goldman Sachs, Nike and Visa.

Q.

What’s deflation? — L.U., Federal Way, Wash.

A.

We all know about inflation, which is the steady rise of prices over time. As you might have suspected, deflation is when prices fall. That might seem like purely a good thing, because falling prices mean you can buy more with your income.

Deflation isn’t always good, though, as it often accompanies a recession and/or a struggling economy. It can be part of a cycle where many people are out of work: They postpone purchases because they’ve lost income, then companies lower production due to reduced demand, then even more people lose jobs. In a deflationary spiral, the economy contracts rather than grows. Meanwhile, businesses (and people) earning less money can have trouble paying down their debts.

Deflation can be countered by lowering interest rates, but rates can only fall so far.