By Nick Colas of ConvergEx
“Serial”-izing the Dow’s New Highs
Another day, another record for the Dow Jones Industrial Average, Main Street’s favorite measure of Wall Street stock performance. How did we get here? The answer sits in a comfortable blend of good returns from a range of industry sectors. Seven of the Dow 30 names have added over 100 points to the total 1,303 point gain for the Average this year: Visa (251 points), UnitedHealth (185), Nike (136), 3M (129), Disney (116), Johnson & Johnson (111) and Home Depot (106). By contrast, there is just one 100 point loser: IBM (negative 137 points). The collapse in energy stocks hasn’t hurt the Dow very much – just 113 points year to date related to declines in ExxonMobil and Chevron. And to satisfy the most common “What if” scenarios we hear: adding Apple on its split day this June would have added an estimated 166 points, and Facebook’s whole-year 2014 performance would have pushed the Average higher by 162 points.
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America’s hottest entertainment property at the moment isn’t a movie, a TV show, or Netflix/Amazon streamed content; it is a podcast. “Serial” is an offshoot of Chicago public radio’s WBEZ “This American Life” and it is a murder mystery narrated by long time radio and print journalist Sarah Koenig. Episodes come once a week, and over 1.5 million listeners now download the shows as they become available. Major news outlets such as People, Variety, Entertainment Weekly, and the Wall Street Journal have covered Serial’s success in recent days.
If you want a sense of Serial’s tone and narrative flow, think of it as equal parts hard boiled “Dragnet”-style storytelling and folksy, Granola-crunchy public radio. For those of you in a younger age cohort, the former was a highly popular radio and then TV show that started in 1951. All the storylines came directly from Los Angeles Police Department cases in what was the first mass media “True Crime” show. The public radio part comes from the narrator, who interviews scores of people associated with the case in a calm and approachable manner. The crime itself – a 1999 murder of a high school senior in Baltimore – seems simultaneously straightforward (the boyfriend did it, and went to jail) and elusive (the primary witness was a self-described drug dealer with a penchant for never telling the same story twice). There are three more episodes for Serial on tap, and in real life the convicted murder has an appeal hearing in January.
Capital markets have their own mysteries, of course. “How did everyone get the bond trade wrong this year” or “when will oil finally turn higher?” Or the big one: “How are we still rallying past the end of the Federal Reserve’s bond buying/QE program?” After all, that liquidity was the go-juice behind the move for U.S. stocks. Without it we were supposed to stagnate. Or, like the old Monty Python skit about the questionable existence of flying sheep: “Notice that they do not so much fly as… plummet.”
The easiest way to analyze what’s taking us higher is, surprisingly, with the oldest stock market measure still in use: the Dow Jones Industrial Average, which set a new all-time record close today. The Dow’s 30-stock list allows us to analyze exactly which names took us to that new high, and which stocks are persistent drags. Yes, other indices like the Russell complex or the S&P products are far more complete, but we are left making broader generalizations about industry groups rather than individual companies and their performance year to date.We’ve included a table after this note with the requisite math, but here are the key takeaways:
- The Dow’s 1,303 point move thus far in 2014 is the result of moves in several names across a few different industry sectors. In total, seven Dow components have added more than 100 points to the Average: Visa (251 points), UnitedHealth (185), Nike (136), 3M (129), Disney (116), Johnson & Johnson (111) and Home Depot (106). Loosely identified, you could call this a consumer/health care rally.
- Only one name has dinged the Average for more than 100 points: IBM (negative 137 points). It’s not that Big Blue has been such a dismal performer, down 13% rather than 30-40%... But its return year to date is the worst of any Dow 30 stock and its high stock price means a high weighting at 5.8%.
- A few names fall into the “Almost 100 point” club. Travelers’ positive 15% YTD return adds 88 points to the Dow, and tech companies Microsoft (up 30% YTD, or 78 points) and Intel (at 45% the best YTD performer in the Average, or 92 points) also help. Unlike the S&P 500, where technology is clearly a leading sector (up 17.6% as of today), in the Dow the group plays more of a supporting role.
- The reversal of fortune in the energy sector hasn’t been much of a headwind for the Dow year to date. ExxonMobil and Chevron are just 7.4% of the Average, and together comprise only a 113 point YTD hit (0.6%) to the Dow. Put another way, Visa alone has more impact on the Dow than the energy names, at a 9.3% weighting.
- There is a Wall Street parlor-style game that goes “What if Apple or Facebook were in the Dow?” Here’s the math. Facebook’s contribution would have been 162 points this year, since the stock is up 38% YTD. Apple is a little trickier, since before its June split it would have been too high priced to enter the Dow (remember, this is a price weighted measurement). However, counting from the June 9th split, Apple is up 24% and would have been worth another 166 points to the Dow.
A few points to sum up. The Dow may lag the S&P 500 by 7.9% to 11.8% YTD, but both are doing yeoman’s work since the October market selloff (10% up in each case). The overall strength in the Dow for the year is fairly broad, with 10 names in a variety of sectors (all listed above) making up essentially the entire 1,300 point move in 2014. Lower than expected interest rates obviously help, but the fact that U.S. markets are powering higher after the end of the Fed’s bond buying is a hopeful sign. As for whether that continues – or how Serial will end – well, the mystery continues.

