The Dow Is All That Matters Now

The Dow Jones Industrial Average may be irrelevant to professional investors, but this +100 year old market measure is the single most important metric for how US consumers will interpret the recent breakdown of US-China trade talks. Every day 5-6x more Americans Google queries that include the term “dow jones” than “S&P”.

And search volumes through today show they are worried:

  • Searches today at the open were 32% higher than Friday’s open.

  • Unlike the typical cadence, searches climbed throughout the day.

  • By 4pm, search volumes were 61% higher than the average close from last week.

  • If equity market volatility continues and drives even more concern, US “dow jones” searches will quickly approach the 1-year record levels set in the last week of December.

  • While only something like 44% of Americans own equities, closer to 100% know that a swooning stock market is often a predictor of their job security and the value of their home.

Unlike last December, however, when Federal Reserve rate policy was a concern markets/investors are now solely focused on US-China trade negotiations. And since the Dow is heavily stacked with large multinationals levered to global commerce, that turbocharges the transmission mechanism that flows from trade/tariff talks through the Dow and on to the economic confidence of Main Street USA.

Because of the wonky price-weighted nature of the Average, we can trace a trade-to-consumer confidence pathway through specific companies. Dow names like Intel (-3.1% today), Cisco (-3.9%), and Dow (-4.0%) might seem important, but they have 3 of the lowest weightings at 1.2%/1.4%/1.4% respectively. That’s the good news…

The bad news: 53% of the Dow is in just 10 names, and among these are several stand-outs in terms of further price pressure from deteriorating US-China trade negotiations:

  • Boeing (9.3% weight). The obvious target for retaliatory Chinese tariffs and/or order cancellations. The controversy around the Max plane doesn’t help either.
  • Goldman Sachs (5.3%). While GS only derives 14% of its net revenues from Asia, investors see large investment banks/asset managers as a proxy for the health of cross-border capital flows and financial asset prices. A messy rewiring of global trade pacts creates market uncertainty.
  • Apple (5.2%): Thus far insulated because of its large Chinese manufacturing base. Thus far…
  • 3M (4.6%): One of the most international companies in the Dow, with 60% non-US revenues and 20% in Asia/Pacific. The stock took a large hit after Q1 earnings but still trades for a premium to the overall market at 18.0x forward earnings.
  • United Technologies (3.6%). Not as international as 3M, but still with 13% of revenues and 17% of operating income from Asia/Pacific.

Also worth noting: these 5 names are responsible for 30% of the Dow’s 8.6% price gain this year. The numbers:

  • The Dow is 1,998 points higher than December 31st 2018.
  • Boeing has contributed 92 points
  • Goldman: +199 points
  • Apple: +206 points
  • 3M: negative 100 points
  • UTX: +193 points
  • Total: 590 points

Why all this matters: 4 of these names – and US stocks generally – have rallied in 2019 because:

  • The Fed changed its policy stance from hawkish to neutral.
  • Q1 earnings were modestly better than forecast.
  • Markets expected US-China trade talks to bear fruit, supporting the notion that the rest of 2019 would show sequential improvement in US corporate earnings power versus Q1.

That storyline worked until Friday, but the last part is now unraveling. Yes, we still believe the US and China will come to an agreement in 2019 but our Dow math shows how sensitive the Average is to markets disagreeing with our sanguine take. Take just 4 names – BA, GS, AAPL, and UTX – to unchanged on the year and you lose almost 600 Dow points. And that doesn’t even count the other 26 stocks, which will likely fall if those key names falter.

Bottom line: even after today’s drop, markets still have confidence that the US and China will reach a deal in time to avoid meaningfully hurting US corporate earnings power. And despite today’s frantic Googling, Main Street’s confidence should hold if the Dow continues to embrace that belief. It all comes down to a handful of stocks, though…

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