By Amrith Ramkumar
Nov. 25, 2020
The Dow Jones Industrial Average’s ascent to 30000 Tuesday signals more companies are beginning to participate in the new bull market, offering hope to investors who have long waited for the rally to widen.
Apple Inc. and Microsoft Corp. were two of the biggest contributors to the blue-chip index’s latest 10,000-point milestone, a journey that took nearly four years. But it was a November rally in lagging cyclical stocks including Boeing Co., Honeywell International Inc. and Goldman Sachs Group Inc. that helped push the 30-stock index over the hump.
Upbeat trial results for coronavirus vaccines developed by Moderna Inc. and the duos of Pfizer Inc. and BioNTech SE and AstraZeneca PLC and the University of Oxford are reordering the market’s winners and losers, prompting wagers that the U.S. economy will return to normal more quickly than anticipated.
That would be a boon for the Dow, which is oriented toward shares of banks and manufacturers that are particularly sensitive to the economy’s trajectory. The index has trailed the S&P 500 and Nasdaq Composite by a historic margin in 2020 and is up 5.3% in 2020. It peaked at 29551 in February, dropped as low as 18592 in March when the economy shut down, then recovered its losses more slowly than its peers.
That is partly because the Dow has missed out on much of this year’s boom in technology stocks. Investors have piled into shares of internet giants such as Amazon.com Inc., Facebook Inc., Google parent Alphabet Inc. and other tech stocks that aren’t included in the index, betting they would emerge as winners of the stay-at-home trends.
The rallies in those stocks have spurred double-digit percentage gains in the S&P 500 and Nasdaq Composite this year. The advances have led some analysts to argue there is a seismic disconnect between the stock market, which continues to set new highs, and the economy, which is still recovering from the pandemic.
Many analysts also have remained skeptical of the stock-market rally because the cyclical sectors hadn’t participated, until recently. The market’s reliance on a handful of internet stocks concerns these investors who say that a broader climb with more companies hitting new highs will lead to a steadier advance.
The recent Dow rally therefore sends a rosy signal to those who contend that major indexes perform best when the economy is exiting a recession and growth-sensitive companies such as banks lead the way. Boeing, Honeywell and Goldman have each risen at least 25% this month, powering the Dow to new records.
“A very important 2021 narrative is going to be recovery and reflation,” said Yousef Abbasi, global market strategist at StoneX Group, referring to economic expansion that is aided by stimulus programs. “It tees up a potential rotation away from a sector that has carried this market.”
In another sign investors are more optimistic about the economic outlook, the yield on the benchmark 10-year U.S. Treasury note has recently hovered around 0.9%, up from a record low of 0.501% hit earlier in the year. Yields tend to climb when investors are anticipating stronger growth and inflation. Higher yields can help bank stocks, lifting the gap between what they pay on deposits and charge on loans.
The recent gains in cyclical stocks will test whether a new group of companies can lead major indexes higher. For much of the past decade, technology has suffered brief periods of underperformance, only for their consistent growth in a world with ultralow interest rates to attract investors once again. Low rates limit returns from holding cash and bonds, making shares of companies that can rapidly grow earnings more appealing.
Apple itself added more than 2,500 points to the Dow during its march from 20000 to 30000, highlighting the iPhone maker’s key role in the global economy. UnitedHealth Group Inc., Microsoft and Home Depot Inc. are next on the list of large contributors to the 10,000-point milestone, underscoring how investors have favored stocks tied to technology, health care and in-home activities lately.
“Technology is a defensive sector now, which is crazy,” said Gene Goldman, chief investment officer at Cetera Investment Management.
In another sign of technology’s importance, business-software company Salesforce.com Inc. was recently added to the Dow, in part because Apple executed a stock split that lowered its share price and its weighing in the index. The Dow gives companies with higher stock prices more influence. As Salesforce joined the index, Exxon Mobil Corp. was one of the companies removed.
Apple first overtook Exxon as the world’s most valuable company in 2011 and joined the Dow about 3½ years later. It then became the first U.S. company to join the trillion-dollar club, with its market value passing $1 trillion in August 2018 and $2 trillion in August 2020.
Editors at The Wall Street Journal participate in selecting the stocks in the Dow, though the index itself is now part of S&P Global Inc.
While many analysts are hoping for a broader rally in the future, some remain confident that themes like remote work and cloud computing will persist beyond the pandemic, giving tech stocks an edge.
“Even when we go back to some sort of new normal, I don’t think any of these trends will change,” said Michael Lippert, who manages the Baron Capital Opportunity Fund, which counts Microsoft, Alphabet and Amazon among its largest holdings.
Write to Amrith Ramkumar at firstname.lastname@example.org
Dow Jones & Company, Inc.