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5 Dow Stocks That Helped the Index Score Big in 2021

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Wall Street is set to close back-to-back highly successful years despite being pandemic-ridden. However, if we compare the relative performance of major indexes in 2020 and 2021, we will find that it is the Dow, which has the best relative performance this year. The great reopening of the U.S. economy supported by nationwide vaccination helped the Dow to perform better.

Several stocks of the 30-stock blue-chip index have rallied this year. Among them, the best five are — Microsoft Corp. (MSFT - Free Report) , The Home Depot Inc. (HD - Free Report) , The Goldman Sachs Group Inc. (GS - Free Report) , UnitedHealth Group Inc. (UNH - Free Report) and Chevron Corp. (CVX - Free Report) .

A Solid 2021 for the Dow

Year to date, the three large-cap-centric stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — have rallied 16.8%, 25% and 20.4% respectively. The small-cap-specific Russell 2000 has gained 12.5% in the same period. In 2020, the Dow, the S&P 500 and the Nasdaq Composite — had rallied 7.3%, 16.3% and 43.6%, respectively. The Russell 2000 had jumped 30.6% last year.

With just five trading days left for this year, let’s do a comparative analysis (comparing the rate of growth of last year to that of this year) of these four major stock indexes. Year over year, the Dow and the S&P 500 have rallied 130.1% and 53.4%, respectively. On the other hand, the Nasdaq Composite and the Russell 2000 have sild 53.2% and 59.2%, respectively. Clearly, the Dow is the undisputed leader of 2021.

The availability of COVID-19 vaccines and an aggressive drive by the U.S. government for the nationwide deployment of vaccines have resulted in a faster-than-expected reopening of the U.S. economy. Unlike the market's benchmark S&P 500 or the teach-heavy Nasdaq Composite, the composition of the Dow is mostly inclined toward cyclical stocks that suffered the most during last year’s lockdown. Consequently, the great reopening benefitted the Dow the most.

Dow’s Momentum Likely to Continue

Massive pent-up demand supported by unprecedented personal savings will pave the way for U.S. economic growth in 2022. Moreover, U.S. businesses are opting for higher spending despite facing chronic labor shortage.

At its current level of 35,753.89, the Dow is well above its 50-day and 200-day moving averages of 35,595.65 and 34,657.54, respectively. The 50-day moving average line is generally recognized as the short-term trendsetter in financial literature, while the 200-day moving average is considered a long-term trend setter.

It is widely recognized in the technical analysis space that whenever the 50-day moving average line surges ahead of the 200-day moving average line, a long-term uptrend for the index becomes a strong possibility.

At present, the blue-chip index is 2.3% below its all-time high of 36,565.73 attained on Nov 8. Despite facing severe volatility in December, the index is up an impressive 3.7% month to date.

Near-Term Drivers

The Conference Board reported that despite facing soaring inflation and the resurgence of the Omicron variant of coronavirus, U.S. Consumer Confidence in December came in at 115.8 surpassing the consensus estimate of 111. November’s reading was revised upward to 111.9 from the earlier reported 109.5. Notably, the sub-index for expectations (based on consumers’ short-term outlook for income, business, and labor market conditions) surged to 96.9 in December from 90.2 in November.

On Dec 21, President Joe Biden said “absolutely no” to whether March 2020-style lockdowns will return to the United States as a result of the rapid spread of Omicron. His administration plans to get more booster shots, distribute 500 million free at-home COVID-19 testing kits and the immediate deployment of military doctors, nurses and other medical professionals to the six most-affected states.

The U.S. economy will get more upside from the government’s infrastructure spending. On Nov 15, President Joe Biden signed a bipartisan infrastructure bill of $550 billion in addition to the previously approved funds of $450 billion for five years. Total spending may go up to $1.2 trillion if the plan is extended to eight years.

The infrastructure development project will be a major catalyst for the U.S. stock markets in 2022. Various segments of the economy such as basic materials, industrials, utilities and telecommunications will benefit immensely with more job creation for the economy.

Stocks in Focus

We have narrowed our search to five Dow stocks that have pulled in the most in 2021. These stocks have strong growth potential for both short-term and long-term (3-5 years) and seen positive earnings estimate revisions within the last 60 days. Each of these stocks carries either Zacks Rank #2 (Buy) or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The chart below shows the price performance of five stocks year to date.

Zacks Investment ResearchImage Source: Zacks Investment Research

Microsoft has a dominant position in the desktop PC market, with its operating systems being used in the majority of PCs worldwide. MSFT is benefitting from strength in its Azure cloud platform amid accelerated global digital transformation. Teams’ user growth is gaining from continuation of remote work and mainstream adoption of hybrid/flexible work model of Microsoft.

Recovery in advertising and job market boosted LinkedIn and Search revenues of MSFT. Solid uptake of new Xbox consoles is aiding the gaming segment performance. Microsoft is witnessing growth in the user base of its different applications including Microsoft 365 suite, Dynamics and Power Platform.

Zacks Rank #3 Microsoft has an expected earnings growth rate of 14.6% for next year (ending June 2022) and a long-term growth rate 12%. The Zacks Consensus Estimate for next-year earnings improved 0.1% over the last 7 days. The stock price of MSFT has soared 50% year to date.

The Home Depot is witnessing significant benefits from the execution of the “One Home Depot” investment plan, which focuses on expanding supply chain facilities, technology investments and enhancement to the digital experience.

Amid the pandemic, customers have been increasingly blending the physical and digital elements of the shopping experience, making the interconnected One Home Depot strategy most relevant. The Home Depot is effectively adapting to the demand for renovations and construction activities, driven by prudent investments. HD is gaining from growth in Pro and DIY customer categories as well as digital momentum.

Zacks Rank #2 Home Depot has an expected earnings growth rate of 4.8% for next year (ending January 2023) and a long-term growth rate 12.8%. The Zacks Consensus Estimate for next-year earnings has improved 1.1% over the last 30 days. The stock price of HD has jumped 49.5% year to date.

The Goldman Sachs Group is benefiting from its business diversification. Within traditional banking, a diversified product portfolio has better chances of sustaining growth than many other banks, which have exited some of these areas. The Goldman Sachs operates in four segments: Investment Banking, Global Markets, Asset Management, and Consumer & Wealth Management.

Amid the continued deal-making frenzy, GS’ solid position in announced and completed mergers & acquisitions globally is likely to keep driving its investment banking revenues in the upcoming quarters. Goldman Sachs’ efforts to diversify fee-based revenue sources and expand globally from strategic acquisitions will support the top line. GS’ steady capital deployment activities act as a tailwind.

Zacks Rank #2 The Goldman Sachs has a negative expected earnings growth rate for next year. However, it has a long-term growth rate 11.2%. The Zacks Consensus Estimate for next-year earnings has improved 2.4% over the last 30 days. The stock price of GS has climbed 45% year to date.

UnitedHealth Group has a strong market position and an attractive core business that continues to be driven by new deals, renewed agreements and expansion of service offerings. UNH’s solid health services segment provides significant diversification benefits.

UnitedHealth Group’s health service business, branded as Optum, is becoming increasingly valuable. The primary growth drivers for Optum are pharmacy care services, care delivery, technology, government services, and international. A sturdy balance sheet and consistent cash flow generation enables investments in business and secures dividend to UNH’s shareholders.

Zacks Rank #3 UnitedHealth Group has an expected earnings growth rate of 15.2% for next year and a long-term growth rate 14.7%. The Zacks Consensus Estimate for next-year earnings has improved 0.1% over the last 30 days. The stock price of UNH has advanced 40.9% year to date.

Chevron is one of the best-placed global integrated oil firms to achieve a sustainable production ramp-up. CVX’s existing project pipeline is one of the best in the industry, thanks to its premier position in the lucrative Permian Basin.

Chevron’s Noble Energy takeover has expanded its footprint in the region and the DJ Basin. CVX now has access to Noble Energy’s low-cost, proven reserves along with cash-generating offshore assets in Israel — particularly the flagship Leviathan natural gas project — thereby boosting its footing in the Mediterranean.

Zacks Rank #3 Chevron has an expected earnings growth rate of 15.6% for next year and a long-term growth rate 5.6%. The Zacks Consensus Estimate for next-year earnings improved 0.6% over the last 30 days. The stock price of CVX has surged 37.6% year to date.