Stock markets and sovereign bond markets are very powerful. In a world in which debt, leverage, and the "wealth effect" appear as pillars on which economic stability seems to rest, equity and sovereign bond markets have the ability to strike fear into the hearts of politicians, bankers, business leaders, and the general public alike. Low equity prices put tremendous pressure on corporate leaders to do something to raise the stock prices of their companies. Likewise, as the benchmark for many corporate bonds, sovereign bond yields can affect the funding costs of corporations as well as their future business decisions.
Low stock prices and high sovereign bond yields can affect the spending decisions of consumers. Given the large exposure many retail investors have come to have to equities or other "risk" assets in recent decades, stock markets have the power to change people's lives in major ways. This is true on a direct basis, in terms of the asset levels people have. It is also true in an indirect manner, in terms of the effects stock prices can have on hiring and layoff decisions, the negative health effects that could come from stressing too much about money (or anything else for that matter), and the perception equity prices can create throughout society as to whether things are generally stable or not. Indeed, stock markets and sovereign bond markets are very powerful.
Among the various equity and sovereign bond markets around the world, many would argue that those of the United States represent the pinnacle of importance due to their size and liquidity. Furthermore, for better or for worse, Americans still play a particularly important role as it pertains to consumer spending worldwide. While the United States might not be the place in which many corporations are focusing their efforts for growth nowadays, any significant pullback in U.S. consumer spending can still result in meaningful consequences for the world. Anything that has the power to change the outlook for American spending habits is something to pay attention to. The U.S. stock market is just such a thing.
When thinking about the power the U.S. stock market still holds over the economic outlook for the world, one should consider the companies that have the most influence on the outlook for U.S. equity indices and therefore U.S. equities as a whole. One could contend that if the outlook for one company has the ability to change the outlook for U.S. equities as a whole, such a company would indeed be very powerful and important.
In today's stock market reality, in which indexing has become so popular, the ability of the largest and most heavily weighted companies in an index to take down the prices of entire groups of stocks becomes larger and larger. If companies whose stocks have the power to take down indices with them do in fact exist in the U.S. equities market, it would not seem inappropriate to label such companies as "The Most Important Stocks in the World." Before delving into the major indices in search of the most important stocks, I'd like to distinguish between the importance of a stock versus the importance of a company.
If the list that follows were called "The Most Important Companies In The World," it would likely include companies such as JP Morgan (JPM) or other systemically important financial institutions whose futures can have profound effects on investors and non-investors worldwide. Clearly, the companies behind the stocks that follow are all important, although some more so than others. What the list that follows is attempting to point out is the incredible importance of the stock price of each company. As investors know, in this day and age, there is more to determining a company's stock price than just its fundamentals.
As the most widely recognized index in the U.S. equities market, the Dow Jones Industrial Average (DIA) seems like a good place to start looking for the most important stocks in the world. As of January 4, 2012, the top five of the 30 holdings in the DJIA were International Business Machines (IBM), Chevron (CVX), McDonald's (MCD), Caterpillar (CAT), and Exxon Mobil (XOM). Together, these five companies, which make up just 16.67% of the total number of companies in the index, have a combined weighting of 35.10%. That means five companies have influence over more than one-third of the entire daily movements of the Dow Jones Industrial Average. Spend a moment thinking about the magnitude of that. In fact, the top weighted company in the Dow, IBM, holds an 11.31% weighting. IBM's stock price alone could turn a quite respectable up day for the Dow into a down day if bad news were to strike the company.
Before simply declaring these five stocks as being among the most important stocks in the world, I'd like to know the influence they each hold in another extremely popular stock market index. Let's take a look at the S&P 500 (SPY). In fact, as of January 5, 2012, three of the top four holdings in the S&P 500 were XOM (#1), CVX (#3), and IBM (#4). Their S&P 500 weightings were 3.57%, 1.90%, and 1.89% respectively. Together, these three companies, which make up just 0.6% of the total holdings in the S&P 500, have a combined weighting of 7.36%. With this kind of influence on what are possibly the two most widely recognized and followed stock market indices in the world, it seems reasonable to include IBM, XOM, and CVX on the list of the most important stocks in the world.
Regarding McDonald's and Caterpillar, numbers three and four respectively in terms of weighting in the DJIA, McDonald's is ranked 27th in the S&P 500 with a weighting of 0.88%, and Caterpillar is 43rd with a weighting of 0.53%. While this is more debatable than IBM, XOM, and CVX, I will add MCD and CAT to the list of the most important stocks in the world due to their large influences in the DJIA, at 6.06% and 5.78% weightings respectively, as well as their ranking in the top 10% of the most heavily weighted stocks in the S&P 500.
The two other companies rounding out the top five in weighting within the S&P 500 are Apple (AAPL) and Microsoft (MSFT). Let's venture over to the Nasdaq 100 (QQQ), to see how much influence these companies have on the index through which many investors attempt to get exposure to technology stocks in the form of the ETF QQQ. As of January 6, 2012, the QQQ's top weighted holding was in fact Apple, at 15.17%; the second largest weighting in the fund was Microsoft at 9.14%. Given that these two companies, which make up just 2% of the companies in the QQQ (Nasdaq 100), have a combined weighting of a massive 24.31% and that they each also hold a top five weighting in the S&P 500, they too should be added to the list of the most important stocks in the world.
Finally, let's take a look at Google GOOG, number three in terms of weighting in the QQQ (Nasdaq 100) at 6.43%. If Google can also show a reasonably outsized influence on another well-recognized index, it too shall be added to the list of the most important stocks in the world. While Google is not a member of the Dow Jones Industrial Average, it is a part of the S&P 500. Sure enough, Google's weighting in the S&P 500 was 1.43% as of January 5, 2012, ranking it 10th among the 500 stocks. With this type of influence in two of the three popular U.S. equity indices, it seems appropriate to add Google to the list.
And there you have it. Due to their outsized influences on the three most popular equity indices in what is arguably the most important equities market in the world, these eight stocks make up the list of the "Most Important Stocks in the World." In no particular order, they are: IBM, XOM, CVX, MCD, CAT, AAPL, MSFT, and GOOG.
One question you might be asking yourself is, "How do I make money with this information?" Here is how three different types of market participants can use this information to enhance returns:
Index Investors: Index investors with longer-term horizons who need a bit of help determining the bigger picture will want to keep the aforementioned stocks on their watch lists. Investors should watch major support levels and major moving averages (such as the 200-day) in each of these stocks to help determine whether dips in the S&P 500, DJIA, and/or Nasdaq should be bought or rallies should be sold.
As an example, one of the reasons I was buying the major dip in the markets last August and October was that even though the major averages had sliced through their 200-day moving averages MA and kept going down, AAPL, IBM, and MCD did not. AAPL and MCD did not even breach their 200-day MAs, and IBM only briefly breached it before quickly recovering. In fact, on October 4, 2011, the day the major averages bottomed, IBM was already making higher lows on its long-term chart.
What about investors who hold the individual stocks of AAPL, IBM, MCD, etc.? How can they use this information in their investment decision making processes? As holders of the most important stocks in the world, these investors do not have to worry as much as others about general market movements crushing their stocks. Instead, they can spend more time worrying about the fundamentals and technicals of their equities and not worry so much about the major averages. Investors in smaller weighted equities might be tempted to sell because the S&P 500 has broken its 200-day moving average and is heading lower; and the temptation makes sense. Market indices affect the movements of all stocks to some degree. It's the nature of the beast in an index-investing world.
Day Traders: In addition to watching the market internals (up vs. down volume/up vs. down issues), traders with a time frame of several hours will want to keep the most important stocks in the world on their watch lists. Day traders will want to watch the relative strength of these stocks as compared to the market indices. If these stocks are underperforming the markets on any given day, the bias on the index/ETF trades should be to the downside. If they are outperforming, the bias should be to the upside. I have used this strategy with much success over the years.
Scalpers: The ultra-short-term day traders should make a watch list with each of these stocks and set up charts to show the S&P 500 (or any other index) and one or two of these stocks overlaying each other. The largest, most influential stocks often lead the market indices in either direction. When individual stocks move, place an order on the index/ETF before it moves. I've had a lot of success with this over the years.
Whether or not you own any of these stocks, it can be helpful to follow their price movements when attempting to determine the future direction of the major market indices and even perhaps the future of worldwide economic stability.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.