Baseball Season, Yogi, and the Dow

In (belated) honor of Major League Baseball’s opening day, we’ll borrow from the sport’s most quotable player to talk about the Dow Jones Industrial Average (which is much less entertaining, but still important).

“Slump? I ain’t in no slump… I just ain’t hitting.” That’s a lesser known Yogi Berra-ism, but one that applies very well to the Dow Jones Industrial Average this year. Yes, it’s been striking out a lot lately… Down 2.0% on the year, which is worse than the S&P 500 (-1.2%) or the NASDAQ (up 2.6%).

“You can observe a lot by just watching.” That sentiment is also important to remember in terms of Dow performance. The entire YTD drop in the Average is due to market worries over trade renegotiations; it’s just not in the first place you’d look.

For example:

#1. No Dow company is likely more susceptible to trade wars than Boeing, with large orders from all over the world, high fixed costs, and landmark status as an American company. But BA is actually holding up the Dow in 2018 - not pulling it lower. Year to date, Boeing is still up 11.0% and adding 254 points to the Average. In other words, without Boeing the Dow would be down 3.0% rather than 2.0%.

#2. The Dow’s 455-point decline for the year comes down to 5 other names, and these tell a more complete story about how tariff disputes are filtering through US equity prices. They are:

• 3M: -120 points
• Caterpillar: -85 points
• Home Depot: -83 points
• Proctor & Gamble: -82 points
• Walmart: -76 points
• Total: 446 points (Chevron is the next one on this list with a -74 point impact)

All have global footprints, either in sourcing (HD, WMT) or markets (3M, PG) or both (CAT). Worth noting as well: the slide in Energy shares (XOM, CVX) has been worth 134 Dow points in 2018, or 30% of the total drop. Aside from that, there are no overarching sector themes at play here.

#3: Can any other positive fundamental catalyst help push the Dow into the green for the year? Given the weightings in the Average, the short answer is “Not really…”

Worries over trade talks touch so many sectors (as highlighted in #2) that it is an uphill battle for the Dow. Better action in the Financials sector might help, but Goldman Sachs has a 7.2% weighting in the Dow and JPMorgan is just 3.1%. Health care is similarly skewed to UnitedHealth (6.4% weight) over J&J (3.7%) and Merck (1.6%).

“It ain’t over til it’s over.” Market fears over multilateral trade wars have dinged the Dow much more than other market measures. Given the data we’ve highlighted, it is easy to see why. Perhaps today’s market action is a sign investors are beginning to dismiss a worst-case scenario…

We’ll know that’s the case when the Dow outperforms the S&P 500 (it did not today). The Average, while an ancient market measure, really is the barometer to watch on this important market dynamic. Like Yogi’s many quotes, it remains relevant even today.