If the most important stock market index in the US was composed today of the same stocks as in 2004, it would not reach 13,000 points, according to an analysis carried out by David Rosenberg from Canadian wealth management firm Gluskin Sheff. In other words, 35% below its current level. And what’s the reason for this? Since 2004, eight Dow Jones companies have been removed. Seven of these are industrial firms: paper company International Paper, steel manufacturer Alcoa, Hewlett-Packard, Honeywell, General Motors, tobacco company Altria and Eastman Kodak. There is also the food giant Kraft, which was included in the index in 2008 and then was dropped in 2012.
If we consider Kraft as a manufacturing company, then eight companies from the secondary sector have left the Dow Jones. And only two have entered the index to replace them: Nike and Chevron, although maybe Apple, which is the latest company to enter, could also do it. In comparison, there have only been three losses in the financial sector: Citigroup, Bank of America and the now extinct AIG, the insurance company which George W. Bush’s government nationalised in 2008. But other financial companies have taken their place: Visa, Travelers and Goldman Sachs. The health sector is represented by United Health, while the pharmaceutical sector, which already had Merck, now also has Pfizer.
But the big winners are the technological stocks. In 1999, this sector did not even account for 2% of the index’s capitalisation; now it accounts for 25%, despite the fact that Facebook, Amazon and Alphabet (which includes Google) are in the index. So the big paradox of the Dow Jones being at 20,000 is that it hardly has any manufacturing stocks, which are the ones Trump says he wants to help. In exchange, technology stocks, the sector which has the worst relationship with the new president, is over represented. That said, up to now, the two industries which Trump has favoured the most have been precisely those which he wanted to punish: the financial and the pharmaceutical sectors.
Dependent on the Fed’s moves
In the case of financial companies, Trump’s first move has been to abandon the “fiduciary rule” which was going to make the criteria which financial advisers, including bank employees, have to follow much stricter. But the impact of this measure on the banks will be small. What the sector is really hoping for is a relaxation of the Federal Reserve’s rules which demand that large institutions have much greater capital reserves than the law requires. The change in the regulation, which could actually happen this year, will free up over 100 billion euros of reserves just from the six biggest banks, according to the Wall Street Journal. All this money will be earmarked for dividends.
With the pharmaceuticals, Trump’s change in attitude has been even more spectacular. After his election, the president declared that these companies “are emerging unpunished for comitting murders” with the price of medication. His objective was to cut state spending on this item by 50%, from 600 billion to 300 billion dollars. One meeting with executives from the sector was enough to make the president renounce this measure.
While all these favours are going round, the ones who are really suffering are the manufacturers. Trump has launched his chavez-like rhetoric against many of them, from UTC to Mondelez, Ford, General Motors or Chrysler. Chavez-like rhetoric is not literary licence, but the only definition possible for a president who has told these companies, quite literally, where they have to invest. And he has threatened to impose tariffs exclusively on companies (something which, on the other hand, is illegal) and their imports from Mexico.
But these companies have other problems. The most obvious one is that Trump’s infrastructure investment plan is advancing and, when it is launched, it’s very likely the amount will be much less than the predicted 1 billion dollars.