If you want to know why the Dow soared above 25,000, I’ll give you a one-word answer: Boeing.
The aircraft maker is by far the single largest reason that the Dow Jones industrial average, to give the oh-so-popular market indicator its full name, is flying high. Through Dec. 22, Boeing stock was up 95 percent for the year, adding 960 points to the Dow, according to information I got from Howard Silverblatt, senior industry analyst for S&P-Dow Jones Indices.
Boeing’s boost to the Dow’s takeoff was more than double that of the second-biggest contributor, Caterpillar, which accounted for 434 points.
Now let’s have some fun with numbers. And in the process, we’ll see why although the Dow is the most popular stock market indicator, professional investors — and index funds — don’t take it very seriously. That’s why there are trillions of dollars in S&P index funds, compared to which the money in Dow-linked funds is barely a rounding error.
Boeing’s relative influence on the Dow and the Standard & Poor’s 500-stock index is a primary reason that the Dow, up 4,991 points (24.9 percent) for the year through Dec. 22, has risen far more rapidly than the S&P, which was up 444 points, or 19.8 percent.
Boeing accounted for just 9.14 of those S&P points, about two percent of the gain — barely a tenth of its 19.2 percent contribution to the Dow’s increase.
How can this be? Part of it is because the Dow has only 30 components while the S&P has 500. But the major reason is that the Dow is an average of the stock prices of its components, while the S&P is based on its components’ stock market values.
In the Dow, a dollar rise in any of the 30 stocks has the same impact as a dollar rise in any of the other 29. A multi-dollar rise in a $300 stock like Boeing is easy to come by. But in the S&P, a dollar rise in a company with one billion shares of stock is only a tenth as much as a dollar rise in a company with 10 billion shares.
And now, we come to the part that I especially love. Involving General Electric. GE, with a stock price in the high teens, is by far the least influential member of the Dow — 0.5 of one percent, compared to 8.2 percent for Boeing, the most influential Dow stock. But it has a higher stock market value.
While Boeing’s sharp price rise accounts for 19.2 percent of the Dow’s increase for the year, GE’s sharp decrease — down 45 percent — subtracted only 1.9 percent.
However, in the S&P, GE’s decline has knocked 14.33 points off the index, while Boeing’s rise has added only 9.14 points.
Sure, it’s obvious that the prospect and then passage of the corporate tax cut, which will boost reported profits (and, I think, will also open up entire new fields of tax avoidance), is a major reason that the U.S. stock market has been rising.
But if you want to know why the Dow is passing 25,000, look up into the sky at the SuperDow. Is it a bird? Is it a plane? No, it’s Boeing. Boeing, Boeing, Boeing.