3 Stocks That Propelled The Dow To A Fresh All-Time High
Zacks Investment Research | Dec 08, 2016 02:02AM ET
The Dow hit a fresh all-time high on Wednesday after stocks shrugged off early losses and moved steadily higher over most of the day. The blue-chip index has now registered gains over 18 of the last 22 trading sessions. The Dow Jones transportation average also surged to an all-time high, sparking speculations that the “Dow Theory” is taking effect.
Most analysts and market watchers now believe that the index is likely to move higher over the rest of the year and even further. While financials have largely powered the Trump rally as well as the Dow, other highly weighted components are also responsible for the index’s continuing ascent. Analyzing the reasons behind these gains could help us to ascertain whether they are sustainable and likely to continue going forward.
Dow Theory in Play?
Even as the Dow closed at a record level for the successive session, the Dow Jones transportation average also closed at an all time high. The Dow transports gained 2.5% to close at its highest level since Dec. 29, 2014. The index also hit an intraday high for the first time in two years.
A section of analysts now believe that since both indexes are creating new milestones, the “Dow Theory” is now in play. This factor is leading stocks to move even higher. One of the leading tenets of Dow Theory, which is the forerunner of modern technical analysis, is that market indexes should move in the same direction in order to determine whether a bull or bear market is in operation.
This principle, originally applied to the Dow Industrial and Rail Averages, is now being utilized by some to explain the recent movement of the index and the transports. The relevance of such an inference is usually questioned since the economy of today is a highly segmented one.
However, Trump’s promises to boost infrastructure spending and loosen financial regulations have acted as strong tailwinds for the transports. This in turn is expected to result in growth for the economy as a whole, lending further credence to the theory.
Rally Likely to Continue
Other market watchers have put forward alternative theories to support the claim that the index and markets could continue to move higher. Some analysts think that investors caught unawares by the sudden rally which began after Trump’s victory will continue to rotate into stocks.
Additionally, the short lull experienced during last week may have convinced them to remain invested in the rally. Alternatively, investors who were expecting to hit a trough in November may now be shy of pulling out of stocks.
Another section thinks that stocks have moved within a narrow band over the last two years. They believe that the Trump rally is only a month old and is likely to continue into the year end. Meanwhile, historical selling patterns are likely to break down this time around following expectations of tax cuts under a Trump administration. This is making investors wait until the New Year before relinquishing the positions they have built up.
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3 Primary Catalysts
With the broader market latching onto the Trump fuelled rally, only six of the 30 Dow components have declined over the last one month. Some key components, such as Apple Inc. (NASDAQ:AAPL) have moved lower after Trump said he would like the iPhone maker to bring back jobs to the U.S. Others like Johnson & Johnson (NYSE:JNJ) quickly lost out on the impetus gained post Trump’s victory. The drugmaker is now hovering close to its 200-day moving average.
However, the strength gained from major components has propelled the index 6.6% higher over the last one month. Here we are examining the performance of the three largest components of the price weighted index.
Performance of the Three Largest Dow Components (1 Month)
The Goldman Sachs Group, Inc. (NYSE:GS) is the largest component of the Dow by weight, at 8.25%, and has also registered the highest gains over the last one month. At 29.5%, it stands head and shoulders above the 17th largest component JPMorgan Chase & Co. (NYSE:JPM) which has notched up the second largest gain of just over 20% over the same period.
Several market watchers suggest that Goldman Sachs alone has largely propelled the Trump rally. Promises of financial sector deregulation, including the proposed repeal of the Dodd-Frank Act as well as an imminent rate hike has helped the stock hit its own all time high.
Goldman Sachs’ forward price-to-earnings (P/E) ratio for the current financial year (F1) is 15.35, lower than the industry average of 17.17.Its earnings estimate for the current year has improved by 2.1% over the last 30 days. The stock has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
3M Company (NYSE:MMM) is the second largest Dow component by weight, making up 6.17% of the total index. The stock has mopped up gains of 3.7% over the last one month which may seem limited compared to its Dow peers. However, market watchers believe that concerns over Trump’s policies have abated to a great extent. It was earlier believed that 3M would suffer as a result of the new administration’s policies. Its globally diversified business and exposure to healthcare were being viewed as major causes for such losses.
However, most analysts now believe that a mix of fiscal stimulus measures and tax cuts is likely to benefit the conglomerate. These measures are also likely to delay a recession, resulting in further upside for the stock.
3M has a Zacks Rank #3 (Hold). It has expected earnings growth of 5.9% for the current year.
IBM Corp. (NYSE:IBM) is the third largest Dow component and carries a weightage of 5.77%. With gains of 5.8% over the last one month period, the tech major has contributed substantially to the Dow’s record breaking spree. As can be seen from yesterday’s strong gains, tech stocks have now recovered from the reverses suffered since election results were declared
Additionally, IBM is an undervalued stock in a sector usually known for its high growth potential. The stock’s forward price to earnings ratio is well below the S&P 500’s forward earnings multiple of 18. Its transition to a cloud based model and attractive dividend of 3.4% also indicates that it will continue to mop up gains.
IBM has a Zacks Rank #3. The stock has a P/E (F1) of 12.20, lower than the industry average of 12.90.
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