TGIF! The DOW, Earnings and Nervous Investors

The rollercoaster ride on Wall Street continues.  It’s actually quite impressive how well things have held up considering the issues faced.  The whipsaw price action has brought back fears.  This week, Investor sentiment fell back to the lowest level on the year, back to the lows around the election.  This is generally a good sign as a contrarian indicator.  This 2 month sideways action has helped correct the massive move higher from November.  The correction has come mostly in time, not in price.  You may recall, the DOW led the charge to new, all-time highs.  Trading this week certainly showed why the S&P 500 is the US Stock Market benchmark, not the price-weighted DOW.  The S&P is just 2% below its all-time high reached in February.

Let’s face it, most people are DOW watchers.  But the Dow Jones Industrial Average does not properly reflect the US Stock Market.  That role goes to the S&P 500.  The DOW is an index of just 30 stocks and is price-weighted.  That means higher priced stocks have greater influence in performance.  The S&P is market cap weighted, so the largest of the 500 companies have the greatest influence on performance.  There’s a big difference.

For perspective, Apple is in both the DOW and S&P.  With a $750 Billion Market Capitalization, Apple is by far the largest publicly traded American company, and the largest component in the S&P 500.  Google and Microsoft are next, both above $500 Billion in value.  Despite its size, Apple is not the largest influence on the DOW.  That honor goes to Goldman Sachs.  The reason is simple, Goldman’s stock price is over $200 while Apple is $140.  In fact, there are 6 stocks in the DOW that have greater influence on the index performance than Apple.  Companies don’t split their stocks like they used to.  Being price weighted, every $1 movement for a DOW stock equates to a 7 point movement in the Dow Jones Industrial Average.  On Wednesday, the DOW declined 120 points.  Half of the declines came from just 1 stock: IBM.  Many other DOW stocks were actually higher that day, but were masked by Big Blue.

We pay very close attention under the hood of the Market.  Small Caps had a great week, up 3%.  The Tech-heavy Nasdaq is back near all-time highs.  While attention is directed at North Korea and France, Corporate America keeps pressing on.  Earnings season is showing some pretty encouraging signs for the rest of the year.  Expectations are for earnings to grow 8% in the first quarter.  Early indications suggest it could be closer to 10%.   Earnings are the primary driver of stock prices, and earnings growth has accelerated this week. That is significant.  When earnings lead, stocks have gone higher.  When Geopolitics lead, they’ve generally gone lower.  The terror attack in Paris ahead of the French election is quite concerning.  With so much activity around the world, this turbulent price action is only natural.   In the face of so much uncertainty and geopolitical concerns, this Market has had every reason to sell-off.  So far it hasn’t.  Stocks aren’t cheap, but they’re not excessively expensive either.  Tax-reform would be a nice additive.  Accelerating earnings growth and nervous investors have historically proven to be a very Bullish combo.  We’re pretty impressed with this price action.  The set up is there for another move higher into Summer.  That’s still our call.  We’re all over it.

Have a nice weekend.  We’ll be back, dark and early on Monday.


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