The Dow Is Industrial Again; Rotation Made It So

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The Dow Is Industrial Again; Rotation Made It So

The Dow Jones Industrial Average’s rally to record highs is more important to the economic recovery than one may think. While it’s not Wall Street’s go-to index for US equity performance and imperfect due to its price-weighted composition, it is still the way most Americans track the domestic stock market. For example:

  • There are far more Google searches every day for “Dow Jones” than “S&P 500” or “stock market”. The top queries all apply to stock performance rather than the news organization.
  • Consequently, the Dow’s performance is the fundamental transmission mechanism for the wealth/confidence effect between equity markets and Main Street/retail investors. That makes it important for consumer spending and investor confidence. Every American worker knows layoffs happen when the Dow is going down far more frequently than when it’s making new highs.

Therefore, we looked at what’s driving the Dow’s new highs this year. We calculated the point contribution for the Dow’s 30 components since the end of last year in order to determine its largest winners and laggards over that period. Here’s what we found:

#1: Just 10 of the 30 holdings make up a little over half (52 pct) of the index:

  • UnitedHealth: 7.3 pct
  • Goldman Sachs: 6.8 pct
  • Home Depot: 5.5 pct
  • Boeing: 4.8 pct
  • Amgen: 4.7 pct
  • Visa: 4.6 pct
  • Caterpillar: 4.5 pct
  • Salesforce: 4.4 pct
  • McDonalds: 4.3 pct
  • Honeywell: 4.3 pct

#2: The Dow is up 1,691 points since 12/31/20, and this came from just six names (data here adjusted for rounding):

  • Goldman Sachs (36 pct of the Dow’s YTD positive point contribution), up 610 points
  • Caterpillar (17 pct), up 283 points
  • Chevron (12 pct), up 209 points
  • Boeing (12 pct), up 202 points
  • JPMorgan Chase (12 pct), up 201 points
  • American Express (11 pct), up 185 points

#3: One third of the names in the Dow are actually down YTD. The worst 5 in terms of point contributions include:

  • Apple: down 85 points
  • Procter & Gamble: -79 points
  • Walmart: -79 points
  • Salesforce: -75 points
  • Merck: -52 points

Here are our takeaways from the data:

#1: Just six old school, mostly “industrial” names account for the Dow’s year-to-date performance to +32,000 for the first time: GS, CAT, CVX, BA, JPM and AXP. They are scattered between the Dow’s 2nd and 23rd top weights, but all rallied enough to be meaningful point contributors. That’s because they all continue to reflect confidence in reopening trades and a steepening yield curve. We remain bullish on Energy, Financials and Industrials.

#2: The Dow actually has decent Tech exposure, but the group has taken some wind out of the Average’s sails with Apple and Salesforce as two of its worst performers YTD. Even still, the rotation into cyclicals and out of tech has been far more helpful than harmful to the Dow’s returns. Despite that a third of Dow names are in the red YTD, they only account for a collective loss of 493 points to the index, or still less than Goldman Sachs’ 610 positive point contribution YTD.

#3: The curse of the Dow continues, somewhat. Last August, Amgen (+0.02 pct YTD), Honeywell (+0.10 pct YTD) and Salesforce (-4.75 pct YTD) replaced ExxonMobil (+49.85 pct YTD), Pfizer (-5.11 pct YTD) and Raytheon (+7.06 pct YTD).

Bottom line: the Dow’s ascent to record highs reflects investor confidence in a robust US economic recovery amid improving fundamentals for cyclicals. It’s also a positive sign for consumer spending/confidence as it is the main barometer of US equity performance used by most Americans.