Some fascinating insights from Nicholas Colas, ConvergEx Group chief market strategist, about which stocks got it done for the Dow this year and why understanding the winners is important into year end. Nicholas says that the theme that has driven this year’s winners (mainly the relative strength of the US consumer versus the world) must be believed if you expect further Dow gains from here.
Here’s how this year’s rally happened, by the numbers…
* The Dow is up 885 points year to date. While there are 30 stocks in the Index, only five really matter to this 7.3% advance on the year. They are Home Depot (164 points), Wal-Mart (107 points), Disney (103 points), Travelers (100 points) and JP Morgan Chase (58 points).
* These five stocks represent 60% of the Dow’s gain this year. The other 25 names are the remaining 40%, but these are the stocks that have the outsized returns (24 – 47% YTD) and sufficiently large stock price to push the Dow Jones Industrial Average higher. Bank of America is up 68% on the year, but because it is a low-priced stock at $9, its influence on the Dow is just 45 points.
* Still, if you do include BAC into the mix, the total for these 6 names is 586 Dow points or fully two thirds of the move in the Index for the year. And you come to the conclusion that some alchemy of financial stocks and consumer discretionary equities have really done the yeoman’s work of the 2012 move higher for the broader stock market.
* While the aging Dow might merit some attention for letting us quickly determine which stocks are the true bellwethers of the current market, it pays to check with the S&P 500 market cap weighted index as well. It does, thankfully, tell the same story of the importance of Financials (up 21.9%) and Consumer Discretionary stocks (18.0% up on the year).
* Pull it all together, and you get the following narrative: U.S. stocks are higher this year because of incremental confidence in the American consumer and domestic banking system. If that is a surprise, just remember that the outperformance I noted in these sectors. How else did they get to be the big hitters, if not by exceeding enough expectations to move higher and take the Dow or S&P 500 with them?
* What is also unique about the Dow’s performance is that the top weighted names, with an aggregate influence of 43% of the index, are essentially zombies when it comes to influence on the Average. Those names are IBM (11.2% weight), Chevron (6.5%), 3M (5.3%), ExxonMobil (5.3%), McDonalds (5.1%), Caterpillar (4.9%) and UTX (4.5%). Lump those names together and – in aggregate – they have contributed 61 points to the Dow for the year.
* Just to pivot back to the S&P 500 for the year, we would be remiss if we didn’t do the calculation I know you want to hear: how much is Apple of the S&P 500’s return year-to-date? The short answer is about 240 basis points of the 12.4% return of the index for the year. Without Apple’s +50% return on the year, in other words, the S&P would only be up 10%, given or take a few basis points for rounding.