The Dow: America Is Watching

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The Dow: America Is Watching

Has Main Street noticed Wall Street’s recent volatility? Google searches for “Dow Jones” say it has. When non-finance people want to see what’s going on in capital markets, that is the term they query online. The S&P 500 may be the more-benchmarked index, but the Dow remains top of mind for everyday Americans.

Here is the Google Trends data for “dow jones” and “s&p” over the last 90 days:

The key takeaway: Google search volumes for “dow jones” exceed levels from the May selloff even though the percent decline this time around is smaller. That earlier peak in the chart was on May 13th, when the Dow had fallen by 4.8% from the end of April. The drop in August was 4.2% through Monday’s lows.

Why that’s important: the Dow Jones Industrial Average is the financial signal most Americans use to gauge the health of the US economy, and recent volatility has them spooked. The rally back this week is therefore important when considering how the general population sees the broad macroeconomic picture.

The other issue to consider here is that the Dow (Main Street’s measure) is badly trailing the S&P 500 (Wall Street’s indicator). The former is +13.1% higher in 2019; the latter is +17.2% YTD. That difference (4.1 percentage points) works out to 950 Dow points.

So where are the problems in the Dow’s 30 names? Right here:

#1: Boeing:

  • At 8.6% of the Dow, thanks to the Average’s price-weighting, BA is the most important name when it comes to Main Street’s measure of US economic health.
  • Only up 4.3% on the year over concerns regarding the 737 Max, Boeing is badly lagging the US stock market.
  • That underperformance has clipped 210 points off the Dow, or 22% (if BA had just matched the performance of the S&P) of the missing 950 points YTD.

#2: United Health:

  • UNH is the second-largest weighting in the Dow, at 6.4%.
  • The stock is down 0.6% YTD, largely due to the overhang of political worries heading into the 2020 US presidential elections.
  • If UNH had performed in line with the S&P YTD, it would have added approximately 250 points to the Dow, or 26% of the gap to the 500.

#3: 3M:

  • MMM is the largest problem in the Dow, at a 4.3% weighting and a 13.8% negative return on the year.
  • If MMM were just flat on the year, that would be enough to add 154 points to the Average (16% of the total gap to the S&P 500). If this underperforming name were just +13% YTD instead of -13%, that would be another 154 points and 32% of the missing 950 points.

Those 3 names, in other words, are 80% of the Dow’s subpar performance relative to the S&P 500. The issues are not in Tech (Apple +28% YTD, Microsoft +36%, IBM +23%), or Consumer (Home Depot +23%, McDonalds +24%), or even Financials (Goldman +24%, American Express +32%, JP Morgan +13%).

The upshot is the Dow is lagging the S&P 500 because of idiosyncratic risks, not wide-ranging trade war concerns. Bad airplane designs, possible changes to the structure of US health care, and one seemingly mismanaged multinational are to blame.

The saving grace here is that Main Street cares less about whether the Dow is +13% on the year or +17%; the average American consumer/worker is clearly more attuned to volatility than level. A calmer market – even one that just treads water or rises slightly – is what they want to see. That may be tough to pull off just now, so we will keep a weather eye out for how this feedback loop develops over the rest of the year.