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The Dow Is Surging – But Its Hottest Stock Might Leave It Paralyzed

Last Updated September 23, 2020 1:49 PM
Josiah Wilmoth
Last Updated September 23, 2020 1:49 PM
  • The Dow Jones continues to march back toward its pre-coronavirus levels.
  • But Goldman Sachs warns that the index’s most important stock may be primed for a severe sell-off.
  • Will the DJIA recovery be able to survive the impending downward pressure?

The Dow Jones Industrial Average zipped higher on Friday, basking in the hope that coronavirus has met its match in a drug called remdesivir . But if Goldman Sachs’ latest rating downgrade is any guide, Dow bulls should enjoy the rally while it lasts.

No, the Wall Street investment bank isn’t skeptical about the outlook for Gilead Sciences’ experimental drug. Nor have its analysts issued a bearish forecast for the stock market as a whole.

What Goldman Sachs did do was slap a stunning warning on one of the Dow’s hottest – and arguably its most important – stocks.

Why Red-Hot Apple Stock Could Crash 20%

The bank downgraded Apple to sell from neutral on Friday and slashed its AAPL price  target to $233. That anticipates a plunge of nearly 20% from Thursday’s close at just under $287.

apple stock, dow jones
Apple stock has been one of the hottest Dow Jones stocks, rallying roughly 40% over the past year. | Source: Yahoo Finance 

Goldman analyst Rod Hall warns that the world faces an economic downturn “unlike any recession seen in modern times” and that luxury brands like Apple are particularly vulnerable.

Hall expects iPhone sales to slump, which will pressure the company to hammer its margins by cutting device prices.

After two further GDP growth cuts from the GS Economics team and with much of the world in lockdown we are downgrading our rating to sell and reducing our Apple forecasts for a third time since February 17…

At this point we have selected a cautious scenario for our central case but we note that COVID-19 is unlike any recession seen in modern times in the severity of the initial downturn with an unpredictable shape to the recovery.

And Apple stock’s other risks are skewed to the downside too. Coronavirus’ impact on global travel and supply chains threatens the production timeline of the 5G iPhone , which Apple plans to release this year.

Apple May Be the Most Important Dow Jones Stock

Apple stock doesn’t have enough ammunition to slaughter the Dow’s recovery single-handedly. But it has a massive 8.35% weighting in the DJIA, which trails only UnitedHealth Group (8.7%) as of Friday morning.

dow 30 stock weightings chart
Apple stock has an extremely large weighting in the DJIA, which could severely restrict the index’s recovery if Goldman Sachs’ predictions come true. | Source: indexArb

This means that Apple holds extraordinary sway over the Dow’s movements. Its weighting is roughly equivalent to the DJIA’s seven “lightest” stocks – nearly a quarter of the index’s 30 components – combined.

You don’t need to dust off the history books to find an example of a single stock causing the Dow Jones Industrial Average to diverge wildly from other major stock market indices.

Before Apple and UnitedHealth were jockeying for the heaviest weighting in the DJIA, aerospace manufacturer Boeing dominated the index. Then two Boeing 737 MAX jets crashed in less than six months. And we all know what happened next.

Boeing stock’s struggles crippled the Dow during the final leg of the index’s historic bull run and were a critical reason the index significantly underperformed the broader market in 2019.

dow jones vs. S&P 500 and Nasdaq, stock market 2019 return
Boeing was a major reason the Dow (blue) underperformed the S&P 500 (black) and Nasdaq (red) last year. | Source: Yahoo Finance 

While the DJIA’s 22% return was nothing to sneeze at, it was relatively underwhelming compared to the S&P 500’s 30% advance and the Nasdaq’s 37% surge.

The Dow will have a difficult time ripping back to all-time highs if Apple is moving in the other direction. And because the Dow is Main Street’s favorite index – even though it’s an outdated and unreliable indicator of the market – its struggles could have a ripple effect on retail investor sentiment.

Disclaimer: The opinions in this article do not represent investment or trading advice from CCN.com