A recent study conducted by academic researchers reveals a market pattern where stocks deleted from an index often outperform the stocks replacing them. The study, led by Jeremy Siegel and Jeremy Schwartz of the University of Pennsylvania, analyzed stock performance data from 1957 to 2003. Their findings indicate that, on average, deleted stocks from major indices such as the S&P 500 outperformed the replacements.

The research sheds light on the upcoming changes in the Dow Jones Transportation Average, where Uber Technologies is set to replace JetBlue Airways. While this move may raise eyebrows among shareholders, historical data suggests that deleted stocks tend to fare better in the long run compared to their replacements.

The study further highlights the case of Exxon Mobil and Salesforce, following the Dow industrials' composition change in August 2020. Despite initial concerns, Exxon Mobil's stock has significantly outperformed Salesforce since its deletion from the index, with an annualized return of 36.1% versus 9.2% for Salesforce, according to FactSet data.

Contrarian analysis, which forms the basis of the study, attributes this phenomenon to market overreactions. Deleted stocks often face challenges while replacements enjoy inflated values, leading to an eventual price correction.

Notably, the research also addresses the changing landscape of index changes. The impact of index-change announcements has been on the decline, with post-announcement gains for added stocks and losses for deleted stocks showing a reduction. This trend was documented in a November 2023 study by Robin Greenwood and Marco Sammon of Harvard Business School.

While the upcoming changes in the Dow Jones Transportation Average may spark short-term volatility, market experts predict that the impact of such alterations may be less pronounced than in the past. As the stock market landscape evolves, investors are advised to consider the historical trends and patterns surrounding index changes when making informed decisions.