How did we get up here? How did this market get so high? How do we keep hitting these records and what's driving this bus?
On a day when the averages are doing pretty darned well, I think it's worth it to look at the top 10 contributors to the Dow's 4.9% increase from 21,349 to 22,405 in the third quarter. Sure, the index is a little atavistic -- I mean, where is FANG in this darned thing? -- but it might help us get a better understanding about why this market has so much staying power.
You don't bring up FANG idly on a day when the acronymic tech four horsemen are roaring and then dismiss them, so let me go over what's going on with them before I get to the main event. To that end, I have discouraging news as FANG has out of nowhere become an undiversified acronym courtesy of ETFs that lump these stocks together. The stocks of Facebook (FB) , Amazon (AMZN) , Netflix (NFLX) and Google (GOOGL) , now Alphabet, were doing absolutely nothing until we learned that Netflix was putting through a 10% price increase for its most popular plan. I have long felt that I would be willing to pay much more for a couple of services: Apple's web service, Netflix, Amazon Prime and Spotify. I bet Netflix gets no pushback whatsoever. The price increase ignited the stock of Netflix, which then took the rest of FANG up as there was no meaningful news on the rest of the acronym. The ETFs that lump these four together were pulled up by Netflix and that's all she wrote.
I wish there was more to it, but I looked at every single piece of news out there and, if anything, it was filled with negatives.
But that's the new ETF-obsessed world for you.
Now how about those 10 Dow stocks responsible for the most recent leg of the rally and the reasons for their elevation. What do they teach us?
Let's start with Boeing (BA) , which contributed 37.5% of the Dow's point gain, a colossal chunk of the action. There were two reasons why this stock rallied. The first is that it won a huge number of orders, far more than anyone expected, because the airlines around the world are quite flush.
The second is the analysts were pretty negative on the cash flow and cost side here, especially from the Dreamliner, which is in rapid production. It doesn't hurt that Boeing is also part of the "defend yourself" wave of investing, meaning that other countries are being asked to defend themselves and that helps Boeing. So does a Republican Congress. It converted a huge number of analysts with that last quarter.
Second is Caterpillar (CAT) , with a stock that contributed 16% to the advance. Cat's stock went up for several reasons: blowout quarter after orders picked up while inventories were low and employment lean, a return to growth in China and Europe and the demand that came from the hurricanes in this country. Like Boeing, there was tremendous skepticism about CAT. The skepticism's been replaced by rampant optimism.
We don't think of the banking stocks as big movers, but they have been and Goldman Sachs (GS) contributed 10.8% to the Dow's gain. Goldman, by its own admission, didn't have a terrific quarter, but the regulatory regime is growing less onerous and I think that's going to make it so the company will be able to boost its return on equity. It's also been a big beneficiary of what we call multiple expansion, meaning that people are willing to pay more for the same earnings estimates because they have grown more optimistic that those estimates will be hit or beaten.
The fourth driver is a total oddity: Chevron (CVX) , with a stock that contributed 9% to the Dow's third-quarter gain. Oil's done basically nothing for several years, but Chevron proved it would have no problem paying its very large dividend and has been able to ratchet back spending while still producing a ton of oil. I wish I could say something else was at work other than the company's done an excellent job navigating a lower oil environment. But maybe that's enough for this market.
Next up is Visa (V) , which was responsible for 7.8% of the advance. The stock has generated great returns year after year in large part because we are still a worldwide paper society that is converting to plastic. Visa's been riding that wave forever. I think what shocked people here is that the modern-day Visa was built by Charlie Scharf, who retired from the job and turned the reins over to Al Kelly, who seems to be doing every bit as good a job as Scharf. I was concerned and I told members of the Action Alerts PLUS club that when Charlie retired it was time to book the big gain. I was wrong. Kelly's terrific and Visa's business is humming.
The failure to repeal and replace benefited the incumbents, and no incumbent company fared better than United Health (UNH) , which had pulled out of numerous exchanges in which it was losing money, and that led to an explosion in profits and a healthy 7.5% contribution to the Dow jump. Even after this run, the stock remains one of the cheapest I follow, and if it would ever come down I would love to add it to my charitable trust, which you can follow by subscribing to Action Alerts PLUS.
Few stocks were as hated as the retailers going into the quarter and one of the least favored was the stock of Home Depot (HD) . It sure wasn't because of the quarter, which was magnificent. It was fears of Amazon teaming up with the pathetic Sears (SHLD) to challenge Home Depot in that lucrative business. I usually have nothing but praise for Amazon's moves, but this one was pure poppycock. So when the hurricanes hit, you can only imagine the rush back into the stock, which has always been a winning way to trade terrible events wrought by Mother Nature. Home Depot's resurgence added 7.2% to the Dow.
How about Apple (AAPL) ? It contributed 7.2% to the advance largely because it delivered a better-than-expected quarter with a very big service stream and because analysts started talking about the big supercycle that comes from its new iPhones. Apple also converted a lot of naysayers into believers as now there seems to be as many bulls as there were bears 50 points ago. (Facebook, Alphabet and Apple are part of TheStreet's Action Alerts PLUS portfolio.)
The stock of American Express (AXP) had been disliked for ages because of faltering, disappointing earnings. Not this time. It delivered and it promised it would get back to its old normalized level of profitability. The stock was in the low $80s at the beginning of the quarter and when it gave you a heads up that the good old days were back, it went to $90, where it was before the decline. That's how it was responsible for 4% of the gain.
The last of the 10? The stock of Microsoft (MSFT) , which, with its advance, added 3.9% to the rally. Microsoft's Azure has become a dominant cloud player and that's made it so the company's got accelerating growth. It's become a real winner and I think it will stay that way when it reports. It's becoming a must-own tech name for the sleep-at-night gaggle of big-time portfolio managers.
When you look at this helpful group in its entirety, you can see some important object lessons. First, there were a lot of skeptics circling around these stocks who got converted to true believers. Second, in a low-rate environment, a solid dividend can give your stock a big leg up. But third and perhaps most important, there's a lot of money coming into this market through indexing and these stocks are beneficiaries of the deluge of passive investments. Put simply, these stocks went higher in large part because they were the only game in town, cash-heavy equities of companies that are doing better than we thought they could do in a slow-growth era.
And that's precisely what's driving this remarkable move that is as memorable in its advance as it is forgettable in the way it's happening.
Join Jim Cramer, CNBC's Jon Najarian and Other Experts Oct. 28 in New York
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