The new 737 MAX 8 aircraft from Boeing experienced two devastating crashes between October 2018 and March 2019. The impact of each was nothing short of catastrophic, both on the humanitarian and financial fronts. Official investigations revealed striking similarities between the crashes, prompting many aviation authorities to deem the 737 MAX unfit for commercial use. The fallout was extensive, sending shares of Boeing (BA) stock, as well as the entire Dow Jones Industrial Average (DJIA), plummeting.
Boeing (BA) and the Dow
As the world’s leading equity index, the DJIA represents the value of the 30 largest industrial companies in the United States. Since 1987, Boeing has maintained membership of this exclusive club as the de facto aerospace industry leader.
Here are the vitals of BA stock:
|Market Capitalization||$212.00 billion|
|P/E Ratio (Q1 2019)||21.56|
|52-Week Low (May 2018/19)||$292.47|
In practice, the DJIA employs a price-weighting methodology in its derivation. Subsequently, the index’s composition emphasizes share price, not necessarily a company’s market capitalization or role in the U.S. economy. For instance, a company with a share price of $400 wields several times the influence of one priced at $150. It’s due to this fact that BA stock is especially important to the relative valuation of the DJIA.
Here are the top 10 companies in the DJIA and their respective weights:
|Johnson & Johnson||3.64%|
This chart illustrates the importance of BA stock to the entire DJIA. It has more influence than industrial giants McDonalds and Johnson & Johnson combined. This is a major factor impacting index pricing — and one that gained importance as controversy shrouded the 737 MAX airliner.
Crashes Have Consequences
The crash of Ethiopian Airlines Flight 302 on March 10, 2019, was the second instance of the 737 MAX failing in a six-month period. The first occurred on October 29, 2018, when a Lion Air passenger airliner plunged into the waters off the coast of Java, Indonesia. All 189 souls on board perished, with the initial cause of the event being unclear.
In both instances, one thing was strikingly evident: Crashes have consequences, specifically on Wall Street. For each of the unfortunate incidents, the stock price fallout was substantial:
- 29 October 2018: BA fell by almost $20.00 per share, plunging 5% for the 29 October session.
- 11 March 2019: Following an early session plunge of 13%, BA pared losses before closing the day down nearly 5%.
Because BA carries the greatest weight of all Dow 30 components, its influence on the entire index was significant. Industry estimates stated that the sudden plunge in BA stock on 11 March hindered the DJIA by 340 points. This is a massive figure, and one that brought enough short-term bearish volatility to negatively influence DJIA-based mutual funds, ETFs, and outright holdings.
Diversification Via Futures
In contrast to traditional stocks or mutual funds, futures give traders and investors a way of quickly addressing risk during exceptionally volatile times. In the case of the Boeing 737 MAX crashes, the E-mini Dow offered market participants a means of immediately hedging against weakness in the DJIA. By taking an offsetting short position in the E-mini DOW or buying a distant front-month contract, a savvy investor could have minimized the impact of plunging BA stock.
The integration of futures products such as the E-mini Dow into an equities-heavy portfolio affords investors the flexibility to address extraordinary circumstances in real-time. For more information on index futures contracts such as the E-mini Dow, check out the complete lineup available at Daniels Trading.