The Dow has experienced a good year, gaining 7.3% to date. A strong performance in the second half of the year, following significant improvement in domestic economic indicators, was primarily responsible for these gains.
This followed a relatively slower first half when the blue chip index combatted macroeconomic concerns from elsewhere to hinder significant gains. On the domestic front, benchmarks overcame headwinds including harsh winter weather, a drop in first-quarter GDP and decline in Treasury yields to close in the green.
The Dow Jones Industrial Average (DJI) gained 1.5% in the first half of 2014. The blue-chip index recorded gains in five out of the last six quarters. The Dow has gained a whopping 5.7% from July to date.
Monthly Performance
Through January, emerging market concerns, China’s dismal economic data and finally the Fed taper dealt severe blows to the market. In January, the blue-chip index plunged 5.3%. This was the Dow’s worst start to a year since 2009.
The Dow rose 4% in February and recorded its largest monthly percentage gain since Jan 2013. The blue-chip index gained 0.8% during the months of March, April and May. May’s gains helped the blue-chip index turn positive for the year.
The Dow gained 0.7% during June. Benchmarks ended in the red in July after escalating geopolitical tensions including the ones in Gaza and Ukraine unnerved investors. The Dow suffered its first monthly decline since January, losing 1.6%, respectively.
The Dow gained 3.2% in August and registered its best monthly gains since February. Encouraging economic data from the housing sector, upbeat ISM Services Index, positive factory orders and favorable trade balance helped benchmarks end in the green for the month.
Heightened geopolitical tensions in Russia and China led to benchmarks ending in the red during September. The Dow declined 0.3%. The Dow rebounded in October, gaining 2%, after impressive earnings results and upbeat economic data helped markets offset some of the losses registered in the first half of the month
The Dow rose 2.5% in November as upbeat earnings results from retailers and US midterm election results improved investor confidence. Since the beginning of December, the Dow has lost around 0.3% to date. This is primarily due to the plunging oil prices. However, the Dow registered two consecutive days of record gains on Dec 17 and 18.
Important Developments
Federal Reserve
Investors were jittery at the start of the year owing to the second $10 billion cut to the economic stimulus plan.
However, assurances by the Fed Chairwoman Janet Yellen about economic recovery calmed the nerves thereafter. In June, markets were positively impacted after the Federal Open Market Committee (FOMC) allayed fears of near-term rate hikes, but tweaked target interest rate forecasts.
This Wednesday, the Fed issued a positive statement regarding economic growth and also mentioned that they will show some patience before hiking the interest rate. The Fed stated: “Based on its current assessment, the committee judges that it can be patient in beginning to normalize the stance of monetary policy”. Analysts believe that the rate hike may come sometime in second quarter of next year.
Yellen also added that Fed officials firmly believe that the inflation rate will achieve the Fed’s target rate of 2%. The Fed also forecasted that the unemployment rate will reach 5.2% to 5.3% by the end of 2015.
Oil Price Slump
During the first half of the year, the energy sector gained from tensions in Iraq, as oil prices shot up. Oil prices rose to their highest level in nearly nine months early June.
However, for over six months now, investors have been dealing with plummeting crude prices. The West Texas Intermediate (WTI) crude price lost momentum in June and has since then been showing weakness. Amid the soft oil pricing scenario, the international cartel of oil producers’ – Organization of the Petroleum Exporting Countries (OPEC) – stand against an oil output cut.
Brent crude price has slumped more than 48% since Jun 19. Crude prices have dropped below $60 a barrel for the first time in five years.
Impact of Global Issues
Russia
Rising political tension between Russia and the West over Crimea severely affected markets on certain days mostly during March-April.
The U.S. President penalized Moscow by freezing personal assets and banning travels for a number of Putin’s allies, as well as forbidding several Russian companies from doing business with U.S. firms.
Benchmarks suffered their biggest losses in months in July on reports that a Malaysian Airlines passenger jet was shot down near Ukraine-Russian border. In August, the Russia-Ukraine crisis led to fresh sanctions against Russia. In response, Russia imposed ban on food import from Europe and the US. The Central Bank of Russia hiked the benchmark interest rate from 10.5% to 17%. This was the biggest single hike since 1998.
China
Economic data from China were largely on the negative side from the beginning of this year. In January, the HSBC preliminary survey showed a contraction in China’s manufacturing sector. In March, larger-than-expected decline in Chinese exports of 18.1% year over year raised concerns of a slowdown in the world’s second-largest economy.
Violent confrontation took place between pro-democracy supporters and the Hong Kong government in September. Meanwhile, economic data continued to be dismal in nature.
October’s positive Chinese flash HSBC/Markit manufacturing purchasing managers’ index (PMI) and China’s impressive factory output data lifted benchmarks in the latter half of the month. However, economic indicators again indicated weakness in November.
Ultimately, on Nov 21, the People’s Bank of China (PBOC) announced its surprise decision to reduce interest rates. The move to reduce rates came after several economic reports indicated weakness in the economy.
Europe
Benchmarks notched record highs early in June after the ECB reduced its key interest rates. ECB also cut the deposit rates to -0.10%; becoming the first central bank to have a negative rate.
Concerns about the European banking system also dragged domestic benchmarks lower in July. Economic data from Europe was dismal in August. However, a recovery plan for Portugal’s banking crisis improved sentiment.
Sluggish growth data from the Eurozone dented investor sentiment in September and October.
Following a recent meeting, the ECB President Mario Draghi indicated that the ECB may consider additional monetary stimulus in the Eurozone to revive the economy. Moreover, ECB also kept the interest rate unchanged at record level of 0.05%. Draghi stated that decline in oil prices will increase deflationary pressure in the area.
Japan
Japan’s economy entered a technical recession after GDP declined 1.6% in the Jul-Sep period.
This was possibly a result of a hike in consumption tax in April from 5% to 8%. Subsequently, the Bank of Japan announced that it will step up asset purchases to 80 trillion yen on annual basis. These announcements led to the Japanese Prime Minister’s call for a snap election in mid-December, two years ahead of schedule.
Middle East
Sectarian clashes in Iraq affected markets on concerns about oil supply disruption. ISIS has captured key towns in Iraq, where Iraq’s biggest oil refinery is located.
Violence in Iraq continued to trouble markets in August. In September, the U.S. launched massive air strikes for the first time against militants in Syria. ISIS continues to be a major source of geopolitical tensions.
Domestic Economic Data
Nonfarm Payroll Data
A surprise weaker-than-expected US jobs report left investors worried about betting big on equities in January. It was reported in January that nonfarm payroll employment moved up 74,000 in December.
According to the U.S. Bureau of Labor Statistics, total nonfarm payroll employment had risen to 113,000 in January. However, unemployment rate had fallen to 6.6%, a five-year low.
The economy added the most number of jobs in November since Jan 2012. The economy also added a minimum of 200,000 jobs for 10 straight-months in November. This is the longest stretch in more than 30 years. Unemployment rate remained at a six-year low of 5.8%.
GDP
GDP shrunk 2.9% in the first quarter of 2014. This was the worst performance in five years. However, investors ignored the biggest contraction of the U.S. economy in the first quarter since early 2009 as the report did not impact benchmarks negatively the following day.
GDP numbers bounced back in the second and third quarters, increasing by 4.6% and 3.9% (second estimate). Real personal consumption expenditure fueled growth on both occasions.
Top 3 Dow Performers on YTD basis
Given below are the top 10 performers on YTD basis:
|
Ticker |
6-Month Performance |
YTD Performance |
|
INTC |
23.7% |
42.6% |
|
UNH |
29.1% |
35.8% |
|
MSFT |
14.1% |
27.0% |
|
NKE |
27.4% |
23.5% |
|
CSCO |
12.3% |
23.3% |
|
HD |
24.7% |
22.3% |
|
DIS |
10.8% |
21.2% |
|
MMM |
14.5% |
17.9% |
|
MRK |
1% |
17.8% |
|
TRV |
11.1% |
17.0% |
Here is a short analysis of our current outlook for the top 3 performers:
Intel Corporation’s (INTC) third-quarter earnings exceeded the Zacks Consensus Estimate and forward guidance did not disappoint. Intel’s promise of success in the mobile segment is encouraging.
Intel’s leading position in PCs, strength in servers, growing position in software and Internet Of Things segments and headway in process technology will remain its key areas of strength.
Intel holds a Zacks Rank #3 (Hold) and has expected earnings growth of 18.8%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 16.49.
UnitedHealth Group Inc.’s (UNH) third-quarter earnings of $1.63 per share beat the Zacks Consensus Estimate by 10 cents. Earnings also grew 6.5% year over year. The improvement came on the back of higher revenues.
The company is consistently gaining from robust Medicaid and Medicare businesses and superior performance by its international operations. The company’s expanding business on public exchange markets and continued strong growth at Optum are also driving growth.
Apart from a Zacks Rank #2 (Buy), the company has current year expected earnings growth of 2.7%. It has a P/E (F1) of 18.11x.
Microsoft Corp.’s (MSFT) first quarter 2015 earnings exceeded the Zacks Consensus Estimate. The reorganization of the business and “cloud-first mobile-first” focus are encouraging.
The enterprise refresh cycle, new subscription model, Azure and promising new products will continue to generate sizeable cash flows. Microsoft holds a Zacks Rank #3 (Hold) and has expected earnings growth of 0.4%. It has a P/E (F1) of 17.80.
Outlook for 2015
Historically, December is considered to be beneficial for investors. This is because it is the second month of what is considered to be the best period for investors.
The outlook for the next year continues to be bright. Faster-than-expected growth in GDP is the major positive on the domestic front. Meanwhile, stimulus measures in China, Europe and the Eurozone have somewhat replaced the tailwind provided by the Fed’s bond repurchase program.
At the same time, the Fed has made several encouraging statements. While it has expressed satisfaction on the improvement in economic indicators, it has said that it will show patience before taking a decision on raising the interest rate. If strong domestic economic data continues to pour in, 2015 could see stocks moving higher. Only significant international headwinds can alter the course of markets southward.
Be among the first to see Zacks Top 10 Stocks for 2015, a portfolio that consists of our Best-of-the-Best fundamentally sound long-term picks designed to perform in any type of market. Get in before the stocks are released on January 2 by clicking here.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
To read this article on Zacks.com click here.
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment