Another week, another market milestone. The Dow Jones index last week topped 22,000 for the first time, and nobody's happier than President Donald Trump. Trump has been tweeting incessantly about the Dow's gains lately. "Was 18,000 only six months ago on Election Day. Mainstream media seldom mentions!"
Both statements are wrong – the media is covering the subject, while election day and Dow 18,000 was nine months ago, not six. Trump's son, Eric, was also tweeting about the Dow, prompting Reformed Broker blogger Josh Brown to respond: "Every single country on earth has a rallying stock market this year. Your dad isn't the president in most of them." Trump's bragging is especially ironic as the US has actually underperformed most countries in 2017. That underperformance becomes more marked when one accounts for the falling dollar. As a result, notes Bespoke Investment Group, the US now accounts for 35 per cent of total global stock market capitalisation – down from 38 per cent at the beginning of 2017.
Who cares about Dow 22,000?
The Dow’s latest milestone occurred on the same day
Apple
shares soared to new all-time highs following another blowout earnings report. However, while Apple is easily the world’s most valuable company, other less important companies are the ones driving the Dow’s gains. Aircraft manufacturer
Boeing
is responsible for almost half (45 per cent) of the Dow’s 2017 gains, with McDonald’s and
United Health
Group the next most important contributors to recent gains.
The Dow comprises only 30 stocks and is weighted by price rather than market capitalisation. Absurdly, that means Boeing, which trades about $240, is deemed more important than Apple (shares trade at $155), even though the latter is worth almost six times as much. Google, Amazon and Facebook aren't even members of the index. The Dow is an irrelevant relic. The US president may slavishly follow its movements, but serious investors should ignore it.
Global stocks on a long winning streak
Stocks are meant to rise most of the time, not all of the time. Should investors be spooked by the MSCI World Index posting eight consecutive months of gains? Such sustained strength is rare – this is the fourth-longest winning streak in history and the longest since 2003, says Société Générale. That was at the very beginning of a five-year global rally, with stocks finally rebounding after being brutalised between 2000 and 2002. In contrast, stocks had already been rallying for five years prior to the 2017 rally. Sceptics argue bull markets often end in a blaze of glory: sentiment gets excessive, fools rush in and a blow-off top ensues. However, SocGen’s data suggests investors shouldn’t see the ongoing advance as unsustainable. It found five previous cases where global stocks went on a winning streak comparable to 2017’s. A year later, stocks were higher every time.
Don’t worry about top-heavy tech sector
A fortnight ago, Amazon's market capitalisation topped $500 billion. A day later, Facebook followed suit, briefly joining three other technology stocks – Apple, Alphabet/Google, and Microsoft – in the $500 billion club. Is the US bull market too dependent on a few high-flying tech stocks? Bespoke Investment Group notes the four largest stocks in the S&P 500 technology sector (Amazon is actually in the consumer discretionary sector) account for almost half the sector's total market capitalisation. They account for 11 per cent of the S&P 500's total market cap – more than the combined weight of the index's smallest 200 companies. Notwithstanding last week's tumble in Facebook and Amazon shares, the tech sector's big guns are clearly important to the stock market rally. However, it's premature to agonise about the top-heavy nature of the US market. Most sectors remain close to multi-year highs. Market breadth, as measured by the number of advancing and declining stocks, remains healthy. "The time to be concerned would be if we ran into a situation like 1999/2000, when the top stocks were rallying but the rest of the market was faltering", says Bespoke. That's not the case today.
Getting crushed by Amazon
A recent Onion article featured some fictional advice from Amazon chief executive Jeff Bezos, namely for business owners to "value your customers, hire well, find a market that isn't being served, and realise that someday I will utterly crush you". Like many Onion parodies, there is some truth in the joke. Approximately one in 10 US companies recently discussed Amazon in post-earnings conference calls, according to Reuters, including companies as diverse as McDonald's, 3M and Johnson & Johnson.
A Bloomberg investigation found Amazon has been mentioned 635 times during earnings calls and other corporate events over the last 90 days (for comparison, President Trump has been mentioned 162 times). Wall Street is similarly fixated on Amazon’s growing reach. It’s mentioned almost twice as often as Apple and Microsoft in research notes, according to Street Contxt, and almost 17 times as much as the average company.
