With the Dow Jones Industrial Average at record highs, today we break down the index to see how it got there and what may drive it higher. No, it’s not Wall Street’s de facto benchmark for US equity performance, and yes, it is imperfect due to its price-weighted composition. BUT… it is still the way most Americans track the US stock market. Consider:
- There have been 8x as many US Google searches for “Dow Jones” than for “S&P 500” over the last 5 years. There are even twice as many queries for “Dow Jones” versus “stock market”.
- When US equities crater, such as in March 2020 right before lockdowns, all these search terms get more attention from retail investors as shown by the large spike to the right of the chart below. Even during such a volatile period, however, “Dow Jones” received far more searches than “stock market” or “S&P 500”.
Consequently, the Dow’s performance is the fundamental transmission mechanism for the wealth and confidence effect between equity markets and Main Street (investors and non-investors alike). That makes it important for both consumer spending and investor confidence, and worth your attention. Therefore, we calculated the point contribution for the Dow’s 30 components since the end of last year to determine which stocks are taking the Average to record highs. Here’s what we found:
#1: The Dow is very concentrated, with 10 of its 30 names accounting for just over half (53 pct) of the index:
- Goldman Sachs: 7.7 pct
- UnitedHealth: 7.6 pct
- Home Depot: 6.3 pct
- Microsoft: 5.3 pct
- Salesforce: 4.5 pct
- Boeing: 4.4 pct
- McDonalds: 4.4 pct
- Visa: 4.4 pct
- Honeywell: 4.4 pct
- Amgen: 4.2 pct
#2: The Dow is up 4,893 points since 12/31/20, and just 3 names make up nearly half (47 pct) of this gain (data adjusted for rounding):
- Goldman Sachs (27 pct of the Dow’s point gain), worth +1332 points
- Microsoft (10 pct), +477 points
- Home Depot (10 pct), +476 points
Add on another 5 names, and just 8 companies make up three-fourths of the Dow’s YTD gain:
- American Express (7 pct): +365 points
- UnitedHealth (7 pct): +348 points
- Caterpillar (5 pct): +247 points
- JPMorgan (5 pct): +233 points
- Nike (4 pct): +184 points
#3: Just 5 names in the Dow are down YTD:
- Merck (a 47-point drawdown)
- Verizon (-33 points)
- Disney (-27 points)
- Amgen (-27 points)
- Coca-Cola (-5 points)
Here are our investment takeaways from the data:
#1: Given the concentrated nature of the Dow, it’s important for its top weights to outperform in order for the index to continue making new highs. That’s how it got there today, with its currently first (GS, 7.7 pct weight), third (HD, 6.3 pct) and fourth (MSFT, 5.3 pct) highest weighted names contributing about half of its year-to-date positive performance. Just those 3 names account for almost a fifth of the Dow by weight at 19.3 pct and have an average return of 38 pct YTD. There are other names with hefty enough weights to also meaningfully drive the Dow even higher given that the top ten holdings make up half the index (see list above), but these are the three largest contributors to date.
#2: The Dow has more financials exposure than the S&P 500 at 13.6 pct versus 11.5 pct respectively, and the huge point contribution of Goldman Sachs (a quarter of the Dow’s YTD returns) shows its outsized exposure to capital markets has served as a DJIA tailwind. Especially strong M&A activity, the SPAC boom and volatile capital markets among other factors have helped GS outperform this year. Of course, higher rates have also given both GS and JPM (3.0 pct weight in the Dow) a boost over the last week. This is the recipe for GS to keep leading the Dow to further highs.
#3: The other two largest winners for the Dow – Home Depot and Microsoft – benefit from important economic and social trends we regularly highlight. In Home Depot’s case, the US suburbanization trend continues, as we’ve been noting repeatedly in the last few weeks. In the case of Microsoft, that’s become a staple name in the US Big Tech trade and lack of regulatory overhang helps it as well. Even with renewed concerns about virus variants, its services and cloud offerings enable a tech-centric world.
Bottom line: where the Dow goes over the near term will come down to three hefty names in the Average: GS, HD and MSFT. Otherwise, other heavily weighted names will need to step up. Regardless, a new closing high on the Dow today is a positive sign for consumer spending and confidence as it is the main barometer of US equity performance used by most Americans.