Escalating trade tensions between the U.S. and China have weighed on financial markets in May. Some analysts are calling these renewed trade tensions the beginning of a doomsday scenario. New tariffs have the potential to not only cut into corporate profit margins, but also push inflation higher in the U.S., especially against the backdrop of a full labor market. That will cause the Fed to come off the sidelines and raise rates.
Thus, one potential outcome here is elevated trade tensions and a rate-hiking Fed. That is exactly what we had in late 2018, and that combo caused stocks to drop 20% into bear market territory. Consequently, some analysts are concerned that a new bear market may be right around the corner.
But these concerns are overblown. In the big picture, U.S. President Donald Trump is married to the stock market, and because he has consistently tied his success to the success of stocks, he essentially has to keep the market afloat in order to improve his re-election odds in 2020. That’s why the U.S. included a grace period for goods in-transit for this round of tariffs. Trump and company want to get a deal done. So does China because their entire economic improvement in 2019 has been predicated on stable trade conditions.
Thus, a deal will get done soon. Once it does get done, this little market selloff will reverse course, and stocks will proceed to march higher.
With that in mind, it seems appropriate to reflect on how impressive the 2019 stock market rally has been. Year-to-date, the Dow Jones is up 10%. To put that in perspective, the Dow has risen by more than 10% in a year only seven times this century. We are already at that level, and it’s only May.
Further, seven Dow Jones stocks are up more than 20% in 2019. That’s largely unprecedented for the Dow, especially this early in the year. Which stocks fall into that category? And will they keep rallying as market conditions remain favorable going forward? Let’s take a deeper look.
United Technologies (UTX)
YTD Gain: 26.7%
The top Dow Jones stock thus far in 2019 is United Technologies (NYSE:UTX), with shares of UTX up nearly 27% year-to-date.
This makes sense. United Technologies is an economic stock. When times are good, the stock works. When times are bad, the stock doesn’t work. That’s the nature of business when you sell big ticket items in the commercial aerospace, defense and building industries. Those industries need favorable economic conditions to do well. United Technologies has benefited from favorable economic conditions in 2019 (full labor market, low rates, renewed business confidence, etc), and that is why UTX stock has rallied in such a big way.
Will it continue? Sure. So long as the U.S. economy remains healthy and trade issues get resolved, then UTX stock has clear runway to head higher for the foreseeable future. I think both of those things will happen. As such, I see UTX stock staying in rally mode for the balance of the year.
YTD Gain: 23.4%
The second best performing Dow Jones stock so far in 2019 is Microsoft (NASDAQ:MSFT). Shares of the global technology giant have risen more than 23% year-to-date.
The story here is pretty simple. Microsoft is all about the cloud. As goes the company’s various cloud businesses (Azure, Officer 365, Dynamics 365, so on and so forth), so goes MSFT stock. Those cloud businesses slowed in late 2018 amid deteriorating global economic conditions. But as those global economic conditions improved in early 2019, Microsoft’s cloud businesses regained momentum. As they did, MSFT stock moved higher.
So long as these businesses continue to gain momentum, MSFT stock will remain on a winning trajectory. For the foreseeable future, Microsoft’s cloud businesses should continue to gain momentum, mostly thanks to continued fundamental improvements across the global economy. As such, MSFT stock should continue to move higher throughout the rest of the year.
American Express (AXP)
YTD Gain: 23.3%
The third-best performing Dow Jones stock so far in 2019 is American Express (NYSE:AXP), the payments processing giant who has seen its shares rally more than 23% year-to-date.
Broadly speaking, the big rally in AXP stock has everything to do with global economic improvements. When the economy is doing well, people tend to spend more on their Amex cards. Thus, as the global economy has improved over the past several months, consumer confidence has likewise improved and investors have implied this to mean that Amex’s numbers are getting better.
But that may not be entirely true. Amex’s January quarter earnings report was a double miss. The April quarter missed on revenues. Across the board, growth is slowing, headlined by deceleration in volume and revenue growth. Thus, while investors are pricing in improvement, that improvement hasn’t shown up yet. Meanwhile, AXP stock trades at a multi-year high valuation level of 15-times forward earnings.
Overall, the rally in AXP stock may have come too far, too fast in 2019. This stock looks due for weakness here and now, as slowing growth will converge on a relatively rich valuation.
YTD Gain: 22.3%
The fourth-best performing Dow Jones stock of 2019 is Disney (NYSE:DIS), as Disney magic has returned to the stock en route to a 22% year-to-date rally.
The big story here? Streaming. Just as Microsoft is all about the cloud, Disney’s gain is all about streaming. Long story short, the company has suffered over the past several years thanks to cord-cutting and a secular pivot away from linear TV, and towards internet TV. Now, Disney is aggressively pivoting into the internet TV arena. The company has already launched and built out ESPN+. Now, they have effectively bought everyone out and completely own Hulu. Next, they are launching their own streaming service, Disney+, which will be like the Netflix (NASDAQ:NFLX) for Disney content.
Investors are rallying behind this huge streaming pivot. It also helps that 2019 features a blockbuster movie line-up and some major theme park expansions and upgrades.
All in all, 2019 is set to be a record, ground-breaking, and revolutionary year for Disney. Investors are excited. All this excitement will lead to DIS stock staying in rally mode into the launch of Disney+ in late 2019. If that launch is a success — which it should be, given Disney’s content portfolio — then DIS stock stay in rally mode for 2020, too.
YTD Gain: 22.1%
The fifth-best performing Dow Jones stock of 2019 is another payments stock which has rebounded meaningfully alongside the rest of the economy — Visa (NYSE:V).
Unlike American Express, though, Visa’s numbers are actually improving. The company has reported two double-beat quarters this year, and while volume and revenue growth slowed in early 2019, growth is expected to rebound throughout the year, and exit 2019 at a similar rate it exited 2018. Broadly, then, Visa’s growth trajectory is improving in-line with the economy. Thus, so long as the economy continues to improve, Visa’s growth trajectory should continue to improve, too.
Meanwhile, Visa stock remains off its mid-2018 valuation highs, so the stock has room to run higher in the event the numbers do continue to improve. This combination of healthy growth and multiple expansion should keep Visa stock on a winning trajectory.
The Travelers Company (TRV)
YTD Gain: 21.8%
Sixth on this list of top Dow Jones stocks of 2019 is insurance giant The Travelers Company (NYSE:TRV).
TRV stock is up nearly 22% year-to-date mostly just because financial market and economic conditions have improved in 2019. In the big picture, this is a slow and steady grower, with a big moat in an insurance market that doesn’t have significant volatility and is supported by stable demand. Ultimately, that means that when financial market conditions are favorable, TRV stock will work.
That’s what has happened through the first four months of 2019. It is what will continue to happen over the next eight months of the year. Trade tensions will deescalate. The Fed will remain on the sidelines. Employment conditions will remain strong. Consumer and business confidence will move higher. Everything will work, and that will help TRV stock march higher.
YTD Gain: 20.5%
The final Dow component that is up more than 20% year-to-date is Cisco (NASDAQ:CSCO).
Broadly speaking, Cisco’s big software pivot is working. Specifically, the company is pivoting away from its legacy business and into subscription-based software services. Doing so more appropriately aligns Cisco with the big SaaS (software-as-a-service) trend, improves revenue predictability and pulls up margins. All of this is working. Cisco’s numbers lately have shown healthy revenue growth acceleration and margin improvements.
But investors are already pricing in a lot of optimism surrounding this software pivot. CSCO stock trades at a multi-year high valuation of 17-times forward earnings. That is roughly in line with the market multiple, when CSCO stock normally trades at a below market multiple given the company’s muted growth prospects. Similarly, the dividend yield is near a five-year low.
All in all, while things are improving at Cisco, all those improvements seem fully priced in. Thus, further upside is challenged by what has become a relatively stretched valuation.
As of this writing, Luke Lango was long MSFT, DIS, NFLX and V.