Trade Wars And Charles Dow's Best Saying

Authored by Nicholas Colas via,

“The one fact pertaining to all conditions is that they will change.” 
- Charles Dow

We start with that quote because today’s note is about the Dow Jones Industrial Average and, of course, about change. The easy bit first: GE is leaving the Dow after being there for 111 years – longer than any other company. The company replacing it, Walgreens Boots Alliance, is all of 4 years old in its current form. At a closing price of $65, it will have roughly 5x more influence on the Dow than GE with its $13 price.

Why Walgreens and not Amazon or Google? Ironically, it is because Charles Dow’s namesake market measurement didn’t anticipate change. Specifically, he never envisioned a world where individual stock returns would be so asymmetric that one group (Tech) would see share prices rise to hundreds of dollars while the rest of the market saw share prices remain around $50. So he made his index price-weighted…

Big mistake, that, because since Google and Amazon trade for $1,168 - $1,735 they will never see the inside of the Dow. Remember that the Dow’s largest weighting is Boeing, with a $340 share price and a 9.8% weighting. Google and/or Amazon would swamp the Average.

Moreover, with the rise of indexing, companies have less pressure to split their stocks so that’s probably not going to happen with Google or Amazon. Not only is single-stock investing less popular, but also exchange traded/passive funds actually like high priced stocks since US trading commissions are paid per share. Fewer shares for the same trade size equates to lower costs.

Of course the other reason the Dow was in the news today was its 13th trip to the unchanged line on the year.

That’s notably worse than the S&P 500, which is still up 3.3% on the year. We pulled the data on what stocks have represented this tug of war in 2018. Here’s the data:

  • 3M (down 15.3% YTD) is responsible for the biggest hit to the Dow in 2018, at 224 points. This is 28% of the Average’s underperformance versus the S&P 500. Worth noting: 3M is one of the most international companies in the Dow, with just 39% of revenues coming from domestic sources.
  • The next 3 losers for the year represent 389 points of headwind, or 49% of the Dow’s slippage to the S&P 500. They are Goldman Sachs (down 10.4% YTD, 174 points), Johnson & Johnson (down 12.3%, 112 points) and Caterpillar (down 9.1% YTD, 103 points).
  • The remaining quarter (23% really) of the Dow’s underperformance to the S&P comes from Proctor & Gamble (down 16.9%, 98 points) and Walmart (down 15.3%, 97 points).

So what does this Dow math lesson tell us about equity market sentiment as we come up on the half-year mark? Three observations:

#1. Home is where the heart and stock market returns are. We mentioned that 3M generates just 39% of its revenues from the US. The numbers for: JNJ (48% non-US revenues), CAT (54% non US), and PG (55% non-US sales). As for Walmart, although its revenues are still 73% US-based, much of what it sells is obviously made elsewhere.

In fact, you can draw a YTD stock price performance line from the zero-return Dow’s heavy non-US exposure to the S&P 500 (39% non-US) at +3.3% to the much more domestic Russell 2000, up 10.3%.

#2. Trade war concerns are one explanation, and certainly a good one for the Dow’s flat-line in 2018 but the S&P 500’s performance needs a few words of explanation. The Tech sector here has both the highest international revenue exposure (58%) in the index and the best performance (+11.7%). Why?

By virtue of China’s home grown tech giants (Tencent, Alibaba, Baidu) and the US’s own leaders (AAPL, GOOG, FB, etc), there is little overlap between the two countries and that’s proving to be a powerful positive for US large cap Tech stocks. Yes, Apple has China exposure but Facebook and Google are both banned. And, of course, Apple’s largest manufacturing partner is China, which helps.

#3. There seems little doubt that the trade-war-of-words between the US and China will only get worse but we take some comfort in Charles Dow’s quote. Things will change, and eventually for the better. But for now, big cap Tech is (and will remain) a popular parking lot for equity capital.


Salmo trutta Thu, 06/21/2018 - 12:16 Permalink

I am the Alpha and the Omega.  I discovered the macro-code in July 1979.

4th Seasonal Inflection Point

Jun. 19, 2018 7:01 PM ET


Buy Stocks.

Sell DXY.

Buy Gold.

Economics is simple – because economics is an exact science. Economics is about: rates-of-change, in the flow-of-funds; in other words, economics is about: *katallactics*- “the effectuated science of exchanges”.


Prognostications are infallible. But accurate prognostications are contingent upon "conforming statistics" (and a little grunt work). There is a lot of room for improvement in the government’s statistics. William Barnett of “Divisia Monetary Aggregates”, an Oswald Distinguished Professor of Macroeconomics at KU (an actual former NASA “rocket scientist”), is right, in that the Fed should establish a “Bureau of Financial Statistics”.


We are only concerned about 2 #s this week. And they were reported more than a month ago. They are respectively: 1980.2 and 1966.3, the “category”: weekly NSA “Total Checkable Deposits (WTCDNS)” on the FRB-STL’s “FRED” database.


The impact on the financial markets is effectuated by a lower reported low in required reserves.


An increase in these #s increases market liquidity, and a decrease (like the trough at present), decreases liquidity. In the current case, the 3rd seasonal rotation will be complete by the beginning of the 4th seasonal inflection point on Wednesday June 20th, “bank-squaring” day. The rotation in financial market liquidity then increases up until July 18, 2018, the 5th seasonal inflection point.


-----– Michel de Nostradame

snblitz Thu, 06/21/2018 - 13:36 Permalink

Is it a trade war to ask for 'fair and reciprocal trade'?

If you can get past the youtube censors you will find that is what Trump has said many times followed by a warning that tariffs will follow a failure at 'fair and reciprocal'.

The countries of the world have over the last 40 years implemented many trade policies advantageous to themselves and disadvantageous to the US.

US politicians and news media sat quietly buy while these went on.  Why?  The politician gained through friends and family with foreign interests.  The media is simply bought and paid for by foreign interests.

Of course the corruption of a politicians started small, but as the public failed to respond to the initial graft, it simply grew and grew.

Politicians become wealthy either directly or indirectly, through friends and family and/or foundations.  This wealth comes from foreign interests.   The politicians (as private citizens) then spend this wealth doing the bidding of their foreign masters.  Often they spend money in domestic campaigns supporting each other with again foreign money.

This is incredibly easy to see.  Just look. Search on the friends and family of your politicians.  Foreign interests or foundations will abound.

Lester Thu, 06/21/2018 - 13:41 Permalink

All the various market timing and operational theories/models are non-applicable when makets are controlled and manipulated by a central governmental or government/central bank "team" whose purpose is to control prices and movement.

As if any casino, especially The Big Casino, is not run to favor The House.  Leonard Cohen's Everybody Knows is the anthem for life in the contemporary world.  A former President and Senator, Secy of State named in a RICO lawsuit yesterday...  More of a Dow/Elliott/Gann signal than anything seen EVER!  Combine that with the IG Horowitz whitewash "report"...

My grandmother used to paint "by numbers" stuff, and was poor at it.  Her sister-in-law was a gifted Taos era painter of some reknown.  Both "painted".  The markets have been "painted" for over 20 years, but the daytraders live in denial.  The clumsiness of the market controllers looks worse than any paint-by-numbers canvas, but still the addicted seek their thrills.   After all, it's only money; and fiat money at that...   


Anyone who makes pretense that T/A (technical analysis) can work in a rigged system, which none of the market forecasting pioneers ever imagined is simply "pushing" what may as well be pure Fentanyl on their audience/subscribers.  


francis scott … Thu, 06/21/2018 - 14:45 Permalink

“The one fact pertaining to all conditions is that they will change.” 
- Charles Dow

            And "Plus ça changeplus c'est la même chose."


Jeez, that was an easy one, Snorkler.