The Dow experienced a particularly tough week, plagued by multiple factors. The blue-chip index declined on Monday as continuing oil price slump and weak economic data dented investor sentiment. The Dow ended in negative territory for the third-consecutive session on Tuesday on renewed rate hike concerns in September.
The blue-chip index took losses again on Wednesday following disappointing earnings from an important component. The Dow declined for the sixth-straight session on Thursday. The Dow has lost nearly 1.6% during the first four trading days.
Last Week’s Performance
Slump in energy shares dragged down the major benchmarks to the negative territory on Friday. The Dow lost around 0.3% following disappointing earnings results from ExxonMobil Corp. XOM and Chevron Corp. CVX.
Another decline in oil prices also weighed on energy stocks. Increase in US oil rigs dented crude prices. WTI crude oil prices plunged around 21% in July, witnessing its biggest monthly decline since Oct 2008.
However, concerns about a rate hike in September eased following weak wage data. The employment cost index showed that wages and benefits paid to employees increased at a record low rate of 0.2% in the second quarter. This was significantly lower than a 0.7% rise in the first quarter.
Over last week, the Dow gained 0.7%. Encouraging economic data including positive GDP numbers boosted investor sentiment. Meanwhile, Fed’s optimistic view about the economy also had a positive impact on benchmarks. Though second quarter earnings remained on the weaker side, some encouraging results helped benchmarks to end the week in positive territory.
For the month, the Dow rose 0.4%. Eased fears regarding the Greek debt negotiations, the Fed’s optimism about the economy and some of the encouraging earnings results boosted investor sentiment over the last month.
Meanwhile, the Fed remained dovish about economic health, which increased September rate hike possibilities. The Fed Chair said that the U.S. economy will strengthen and expects the central bank to hike interest rates. Most second quarter earnings were disappointing in nature.
Also, decline in oil prices continued to dent investor confidence. Weak demand in China, concerns regarding over supply of oil and continuous increase in US drilling-rigs weighed on oil prices.
The Dow This Week
The blue-chip index lost 0.5% on Monday as continuing oil price slump and weak economic data dented investor sentiment. While it was the first time when the price of Brent crude oil declined below $50 per barrel since Jan 29, the price of WTI crude oil touched its lowest level since Mar 19.
ISM manufacturing index declined from June’s 53.5% to 52.7% in July, lower than the consensus estimate of 53.5%. Construction spending rose at a meager rate of 0.1% in June to $1,064.6 billion, witnessing its slowest growth since February.
Moreover, disappointing manufacturing data out of China raised concerns. Caixin and Markit reported that the final reading of Purchasing Managers Index declined to 47.8 in July in China, its lowest level since 2013.
However, encouraging auto sales report limited losses yesterday. Seasonally adjusted annual sales rate climbed 3.2% from June to 17.6 million in July, its second highest tally in a decade.
The Dow lost nearly 0.3%, ending in negative territory for the third-consecutive session on Tuesday on renewed rate hike concerns in September. Though recently released dismal economic data eased rate hike fears, comments from Atlanta Fed Reserve president reignited such concerns. In an interview with The Wall Street Journal, Atlanta Fed Reserve president Dennis Lockhart signaled that the Fed is preparing for a rate hike in September.
Meanwhile, a significant decline in Apple Inc.’s AAPL shares also weighed on markets. Shares of Apple lost 3.2% on Tuesday amid China’s economic growth worries and concerns regarding demand for iPhones. It was also the biggest loser among the blue chip companies.
The blue-chip index lost nearly 0.1% on Wednesday following disappointing earnings from The Walt Disney Company DIS. Shares of Walt Disney plunged 9.2%, witnessing its biggest one-day drop since 2008, after reporting a fiscal third quarter revenue miss.
Other benchmarks fared better as weaker-than-expected job data reduced concerns regarding a rate hike in September. ADP reported that the private sector generated 185,000 jobs in July, lower than previous month’s tally of 229,000, which was revised downward from earlier reported figure of 237,000.
On the other hand, encouraging service sector data had a positive impact on benchmarks. The ISM Services Index increased to 60.3 in July from June’s 56. This was the highest level for the index since Aug 2005. Meanwhile, another slump in oil prices dragged down energy shares.
The Dow lost nearly 0.7% on Thursday, declining for the sixth-straight session. This is its longest losing stretch since October. A steep decline in TV-subscribers weighed on the earnings results of major media companies. Worries about the fact that customers are substituting the cables for live streaming resulted in a sell-off in media stocks. It was reported that media sector lost nearly 11% this week.
Meanwhile, investors remained cautious ahead of monthly job data following weak initial claims data. Jobless claims for the week ending Aug 1 were 270,000, up 3,000 from the previous week. However, it was below the consensus estimate of 272,500.
Components Moving the Index
Walt Disney reported third-quarter fiscal 2015 earnings per share of $1.45 that rose 13% year over year and beat the Zacks Consensus Estimate of $1.39 by a wide margin, marking the eighth consecutive quarter of earnings beat.
Revenues increased 5% year on year to $13,101 million, but were a tad below the Zacks Consensus Estimate of $13,169 million, leading to a 7% drop in share price in after-hours trading on Aug 4.
Management stated that lack of hedges at favorable rates against forex volatility will hit fiscal 2016 operating income by $500 million. Also, loss of subscribers at ESPN will reduce Cable Network’s affiliate revenues.
However, the company’s total operating income came in at $4,120 million, up 7% year over year.
Chevron reported dismal second quarter earnings amid a plunge in oil prices. Earnings per share came in at 30 cents, well below the Zacks Consensus Estimate of $1.13 and the year-ago profit of $2.98. Shares dropped around 4.5% in early trade on Jul 31.
The company’s quarterly revenue moved down 30.3% year over year to $40,357 million. However, it was enough to beat the Zacks Consensus Estimate of $29,533 million on improved downstream results.
The second-largest U.S. oil company by market value after Exxon Mobil spent $8,724 million in capital expenditures during the quarter. Approximately 92% of the total outlays pertained to upstream projects.
ExxonMobil posted second-quarter 2015 earnings of $1.00 per share, missing the Zacks Consensus Estimate of $1.11. The bottom line also decreased from $2.05 in the year-ago quarter. The decline stemmed from an environment of persistently falling commodity prices.
Total revenue in the quarter decreased from $111.2 billion in the year-ago quarter to $74.1 billion. But the top line came above the Zacks Consensus Estimate of $66.4 billion. Capital spending decreased 16% year over year to $8.3 billion.
Apple shares plunged 3.2% during the trading session on Aug 4, after the company denied any plans to offer wireless carrier service. On Monday, media reports stated that Apple intended to launch its mobile virtual network operator (MVNO) service in the U.S. and Europe.
Through an MVNO, tech companies can offer their customers network services by leasing it from existing carriers. It was also reported that Apple was in talks with various telecom operators to lease their network.
Microsoft Corporation’s MSFT release of the latest version of its flagship operating system (OS), Windows 10, was a huge success: 14 million downloads within the first 24 hours.
According to Yusuf Mehdi, Windows’ marketing head, the initial response has been overwhelming with enormous demand for the OS and positive reviews and customer feedback. Mehdi stated that Windows 10 is being released in phases to ensure a smooth downloading experience.
General Electric Company GE is launching its first hosted cloud service, Predix Cloud — a service crafted specifically to handle industrial data and applications.
The cloud, which is currently in beta test in certain parts of GE, will be rolled out to other corporate groups by 2015 end, and will be opened to external customers next year. It is primarily aimed at globally regulated heavy industries such as aviation, healthcare, transportation and energy.
GE expects revenue of $6 billion from software in 2015, a phenomenal 50% growth from $4 billion generated in 2014. Most of this is attributable to a pattern-finding system called Predix.
The Goldman Sachs Group, Inc. GS has raised estimates for potential legal losses by 55% to $5.9 billion in its latest quarterly filing. According to sources, the increase is triggered by a probable settlement with authorities regarding risky mortgage-backed securities.
Notably, Goldman disclosed that the U.S. Attorney for the Eastern District of California has found it guilty of violating federal laws that govern the underwriting, sale and securitization of residential mortgage-backed securities.
In this regard, the company noted that, “potential resolution of this matter and were it to be resolved, of which there can be no assurance, such resolution may result in significant penalties and other costs”.
Performance of the Top 10 Dow Companies
The table given below shows the price movements of the 10 largest components of the Dow, which is a price weighted index, over the last five days and during the last six months. Over the last five trading days, the Dow has lost 0.8%.
|
Ticker |
Last 5 Day’s Performance |
6-Month Performance |
|
GS |
-1.1% |
+11.8% |
|
MMM |
-0.1% |
-10.1% |
|
IBM |
-2.1% |
-0.3% |
|
BA |
-0.1% |
-2.8% |
|
AAPL |
-7.5% |
-3.2% |
|
UNH |
+3.5% |
+13.4% |
|
UTX |
-0.3% |
-17.4% |
|
HD |
+2.6% |
+6.9% |
|
TRV |
+0.2% |
-1.6% |
|
CVX |
-6% |
-22.3% |
Next Week’s Outlook
Markets have been traversing rough waters in recent times, weighed down by multiple factors. The slump in oil prices means that energy stocks continue to trend downward. Second quarter earnings have been disappointing in nature and rate hike fears continue to stalk investors.
The blue chip index has been severely affected, primarily because of dismal results from several key components. This includes companies across the entire market spectrum. While energy majors are the usual suspects, software and media giants also figure on the list.
Economic data has also been mixed in nature. The disappointments have helped stave off rate hike fears to some extent. Again, some of the better readings have pushed benchmarks upward. On the whole, the markets are beginning to show symptoms of rate hike jitters.
The key to next week’s investor sentiment probably lies with Friday’s monthly jobs report. This is expected to determine the Fed’s call on the rate hike next month. Other key reports to be released next week include retail sales numbers. Any positive indications on this front could help stocks return to their winning ways.
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