Caterpillar has a major effect on the Dow

Associated Press

NEW YORK

It’s Caterpillar’s market.

The Illinois maker of earth movers is just one of 30 companies in the Dow Jones industrial average, but you wouldn’t know it from its impact on the index recently. Caterpillar’s stock is responsible for 40 percent of the Dow’s climb since the year began.

Translation: If not for Caterpillar Inc., the world’s most widely followed stock index would be up just 2.5 percent this year instead of 4.1 percent. Take out gains from the next three biggest contributors to the index — McDonald’s Corp., DuPont Co. and Boeing Co. — and we would be sitting on losses.

“It’s all about Cat,” marvels BNY ConvergEx strategist Nicholas Colas in a recent report. “Names [such as] Microsoft, Cisco, Bank of America and Intel might be large companies but as far as Dow impact goes, they are tiny.”

Caterpillar is one of the great American success stories coming out of the recession. Sales of its loaders, excavators and harvesters jumped 37 percent in August, much of that thanks to demand abroad. So if you like to cheer on the Dow now that it’s risen for a fourth week in a row, news that Caterpillar is the pied piper of those gains should make you happy.

Just don’t confuse the Dow with the stock market or the economy.

The Dow has a big flaw that explains its top-heavy nature. The index gives greater weight to high-priced stocks than to low-priced ones.

You might think investing $30 in a mutual fund tracking the Dow means $1 is riding on each of the 30 stocks. In reality, the higher the price, the more of that $30 is allocated to that stock. Stock in Caterpillar closed Friday at $79.73 a share — more than four times the price of General Electric Co. or Intel Corp. So if you put money into a mutual fund tracking the Dow, more than four times as much of that money will end up in this one stock than in GE or Intel.

Now consider that this buying could raise the price of the stock, begetting more buying. So, as Caterpillar was leaving other Dow members in the dust with a 40 percent rise this year, more and more of each new dollar in the index went into this manufacturer.