Is the Dow That Big a Deal?

 | Aug 03, 2017 | 5:05 PM EDT
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Thursday's market action was indicative of recent trends. The Dow Jones Industrial Average eked out a gain, posting a record close for the seventh consecutive day. The Nasdaq Composite lagged on the day with a 0.35% decline, and that continues the trend of group rotation away from the tech-heavy benchmark, a dynamic that I believe will continue throughout the third quarter. 

I have mentioned this in many prior Real Money columns, but professional investors largely ignore the DJIA in favor of broader indices like the S&P 500. As an equal-weighted, price-weighted index, the DJIA certainly has its weaknesses as a benchmarking tool, but I keep seeing the picture of the trader with the "DOW 22,000" hat on CNBC, and it makes me curious about this old relic of an index. 

With the Dow posting an 11.45% price appreciation year to date, and ahead of Friday's widely followed nonfarm payrolls report for July, this is a good time to, pardon the pun, take stock of the DJIA. 

Also remember that, owing to its price-weighted nature, moves in higher-priced stocks (those with higher values per share, not P/Es, etc.) will have an outsized impact on the DJIA. So a 1% move in 3M (MMM) shares is worth more, in DJIA points, than a 1% move in Pfizer (PFE) shares. Each of the 30 stock prices is divided by the same divisor (currently 0.14602128057775) to calculate the DJIA. 

So, if you were hoping to print up "Dow XX,000" hats on a regular basis throughout the year, you would want the highest-priced shares to perform the best. That's exactly what has happened this year. Simply put, Boeing (BA) has been a monster. Boeing's $82.50 increase in share price thus far in 2017 (a 53% gain) computes to 565 DJIA points. The aerospace giant's massive move has represented exactly one quarter of the total gain of 2,261 points posted by the DJIA this year. 

Apple (AAPL) and McDonald's (MCD) are two other triple-digit stocks posting notable gains this year, and those two companies' combined gains combine very neatly to produce an increase of exactly 500 points for the DJIA in 2017. So Boeing, Apple and McDonald's have combined for about 45% of the DJIA's net point gain in 2017. (Apple is part of TheStreet's Action Alerts PLUS portfolio.) 

The list of losers is not long, obviously, but household names GE (GE) , IBM (IBM) and Exxon Mobil (XOM) have posted double-digit declines this year, and Verizon (VZ) , Chevron (CVX) and Goldman Sachs (GS) are also in the red year to date. 

That still leaves 21 stocks in the "great middle" of the Dow Jones Industrial Average. I believe it is from this segment that the DJIA will take its performance cue for the rest of the year. Tech giants like Intel (INTC) (0.6%) and Cisco (CSCO) (+4.4%) have lagged so far and I would watch out for them as the Nasdaq rolls over. If we do enter a more defensive market environment, strong performers such as Walmart (WMT) , Home Depot (HD) , Visa (V) and American Express (AXP) would likely outperform in the second half of the year some of the first half's tech highfliers. 

The move from 22,000 to 23,000 would only represent a 4.5% gain in the DJIA, but it is the makeup of that move -- the performance of the individual components -- that will be most relevant to your individual portfolio.

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