UnitedHealth Group stock crashed on Thursday, falling more than 22% and putting the stock on track for its largest single-day decline since 1998.
The slide is a problem for the health insurance giant, no doubt.
But the decline also created a broader stir in markets, specifically for the Dow Jones Industrial Average (^DJI).
Unlike its peer indexes, the S&P 500 (^GSPC) and Nasdaq Composite (^IXIC), the Dow is calculated using the per-share price of its members, not the market capitalization of the companies in the index.
UnitedHealth (UNH) stock, which before Thursday’s drop boasted a price in the $500 range, exerts the biggest influence on the Dow despite the company’s market value being ranked only eighth among the Dow’s 30 members.
In afternoon trade on Thursday, the Dow was off 260 points, or about 0.6%, while the S&P 500 was up 0.9% and the Nasdaq traded roughly 0.5% higher.
As of 3:05:24 PM EDT. Market Open.
UNH ^DJI
The Dow dates back to 1896, making it the oldest of the major US stock market averages.
Created by journalist Charles Dow, the index initially tracked the 12 industrial companies that were the engine of the US economy at the time. By 1928, the number of components had increased to 30, where it stands today.
The index average is calculated using the so-called Dow divisor, a number that changes based on the stock prices of the Dow’s members. The Dow divisor today stands at around 0.163, which roughly means every $1 change in the price of a Dow member’s stock results in a roughly 6.1-point change in the index.
UnitedHealth’s decline on Thursday, for instance, shaved as many as 800 points off the Dow all on its own.
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The per-share price of any company’s stock is simply its market capitalization divided by the number of shares outstanding. The numerator in this calculation is how much investors think the company’s future cash flows are worth, discounted back to the present. The denominator is arbitrary, set at the discretion of management.
As the chart below shows, prior to the stock’s plunge, UnitedHealth shares had the largest price weighting among Dow components, followed by Goldman Sachs (GS) and Microsoft (MSFT).
“The Dow is a dinosaur,” industry veteran and former Citi managing director, Dave Weisberger, told Yahoo Finance.
“The Dow is one of those symbols of American finance … but it’s no longer representative of the modern financial system,” he added. “There’s a reason why the S&P 500 is the bellwether by which everybody who is even remotely serious about the market measures the broader stock market.”
