The Dow declined for the second consecutive week, weighed down by a slump in oil prices. The index declined 0.7% on Monday due to a selloff in energy and material shares. The index suffered losses again on Tuesday after it was dragged down by declines in energy and material shares.
The index dropped for the third consecutive day on Wednesday as oil prices continued to fall, fueling concerns about global economic growth. The blue-chip index rebounded on Thursday, as investors bought beaten-down energy shares. The Dow has declined 1.5% during the first four trading days.
Last Week’s Performance
Last Friday, the Dow surged 2.1% following an upbeat jobs report, which made it almost certain that the Fed will hike rates later this month. This was the index’s biggest one-day percentage gain in almost three months. The U.S. economy created a total of 211,000 jobs in November, beating the consensus estimate of 199,000. November’s job gains pushed average monthly jobs growth to 210,000 so far this year.
Financial companies gained since a rate hike bodes well for them. JPMorgan Chase & Co. JPM gained 3.2%. Gains in financial shares offset losses in energy shares. Energy shares took a beating after oil prices declined following Organization of Petroleum Industries’ (OPEC) decision to maintain a production ceiling, which reflects the “current actual” output.
Meanwhile, European Central Bank President Mario Draghi’s reassurance to step up stimulus program to achieve the desired inflation rate boosted investors’ sentiment. He said that “there is no particular limit to how we can deploy any of our tools.”
The Dow This Week
The index declined 0.7% on Monday due to a selloff in energy and material shares. Following OPEC’s decision to maintain a production ceiling, U.S. crude stockpiles declined by 1.2 million barrels for the week ending Nov 27, a development which also weighed down on oil prices. Dow components, Exxon Mobil Corp. XOM and Chevron Corp. CVX, dropped 2.6% and 2.7%, respectively.
On the other hand, airline shares gained due to the fall in oil prices. Weak oil prices had boosted the bottom line of carriers in the past quarters. Meanwhile, in an interview to The Wall Street Journal, Atlanta Federal Reserve President Dennis Lockhart expressed his support for an interest rate hike next week.
Additionally, St. Louis Fed President James Bullard said that given the low unemployment rate, policymakers have justified a rate hike on “reasonable confidence” that inflation will increase to its desired target of 2%.
The index suffered losses for the second straight day on Tuesday, dropping 0.9% after it was dragged down by declines in energy and material shares. Apart from last Friday’s and Monday’s developments, U.S. stockpiles have increased for 10 weeks in a row when supplies usually decline at the onset of winter.
Further, the U.S. Energy Information Administration expects crude production of 9.33 million barrels a day for this year, up from an earlier estimate of 9.29 million barrels. In a volatile trading session, both the WTI and Brent crude oil closed at their lowest settlement prices since Feb 2009. Dow components, Exxon Mobil and Chevron, dropped 2.8% and 0.9%, respectively.
Meanwhile, disappointing trade data from China raised concerns about a global recession, which in turn negatively impacted demand for commodities. Material stocks took a beating following China’s dismal trade data. While China’s imports declined for the 13th successive month, its exports fell for the 5th consecutive month.
The index dropped 0.4% on Wednesday as oil prices continued to decline, fueling concerns about global economic growth. Drop in oil prices for the third straight day on Wednesday weighed on investor sentiment. However, the energy sector was able to finish in the green helped by an early rally in oil prices. Exxon Mobil and Chevron each advanced 1.3%.
Meanwhile, the materials sector ended in the green on Wednesday after The Wall Street Journal reported that E. I. du Pont de Nemours and Company DD was in advanced talks to merge with The Dow Chemical Company DOW. Shares of both DuPont and Dow Chemical soared 11.9%
The index rebounded on Thursday, gaining 0.5% as investors bought beaten-down energy shares. Oil prices continued to decline on Thursday following OPEC’s report that showed the group raised its production level in November to its highest monthly level in three years. In November, total production increased by 230,100 barrels a day from October, to 31.695 million barrels a day, the highest since Apr 2012. The increase in output levels was mainly driven by increase in production by Iraq.
Last month, Iraq’s output increased by 247,500 barrels a day to 4.307 million barrels a day. Iraq’s output this year climbed by around 500,000 barrels a day. Iraq has been increasing its production levels to boost the country’s economy, which has been impacted by a conflict with Islamic State of Iraq and Syria.
However, investors decided to buy beaten-down stocks on Thursday, which helped energy shares end in the green. Gains in energy shares also helped key indexes end with modest gains. Exxon Mobil and Chevron advanced 0.1% and 1.9%, respectively.
Components Moving the Index
DuPont and Dow Chemical are in late-stage talks to combine their businesses, according to The Wall Street Journal. The report said that the companies could announce a merger deal in the coming days, citing people familiar with the matter.
The sources also told the Journal that the merger would be followed by a three-way breakup of the integrated company. The combined company could split into agricultural, material sciences and specialty-products businesses, the sources revealed. Dow’s CEO Andrew N. Liver is is expected to be the executive chairman of the combined company. DuPont’s CEO Edward Breen is expected to retain his title at the new entity.
The merger, which if it eventually takes place, would create a chemical powerhouse with a combined market value of around $120 billion. The deal would see the union of two top American chemical companies that have been in business for more than a century. It would also rank among the biggest mergers and acquisitions (M&A) deals announced this year, the Journal report noted.
JPMorgan Chase & Co. raised its stake to 10.1% in Telecom Italia S.p.A. TI, an Italian telecommunications company that operates mainly in Europe, the Mediterranean basin and South America, according to a filing by the Italian market regulator Consob.
The overall long position of JPMorgan is held through a previously disclosed stake of 4.5% as well as call options that can be exercised at different dates up to Jul 7, 2017 and other contracts. The position was held as of Nov 26, 2015, when stringent disclosure rules regarding stakes held in listed Italian companies came into play
Home Depot Inc. HD reiterated its recently updated guidance for fiscal 2015 and unveiled long-term targets for the next three years (through fiscal 2018). The company also revealed that it is on track to reach its growth targets for fiscal 2015 that were laid down in Dec 2013. Consistent with this, the company expects operating margin growth of 13% and return on invested capital (ROIC) of 27% at the end of fiscal 2015.
Through the end of fiscal 2018, Home Depot targets sales of nearly $101 billion, representing a compounded annual growth rate (CAGR) of 4.7%. The company also set an operating margin growth target of 14.5%, while aiming to achieve ROIC of 35% by the end of fiscal 2018.
Further, Home Depot’s reaffirmed fiscal 2015 outlook projects sales growth of approximately 5.7%, along with a comparable-store sales increase of nearly 4.9%. Earnings are anticipated to come in at $5.36 per share, up about 14% from the previous fiscal.
General Electric Company GE announced that it has scrapped the deal to sell its electronics appliance unit to Swedish premier electronics manufacturer Electrolux AB ELUXY. Although the company has cited no official reason for the termination of the $3.3 billion transaction in limbo, it is apparently evident that the acrimonious lawsuit filed by the U.S. Department of Justice (DOJ) and its continuous scrutiny has likely led to the cancellation of the deal.
The lawsuit, intended to prevent an alleged duopoly in the U.S. appliance market for stoves and ovens, as General Electric, Electrolux and market leader Whirlpool Corp. WHR commanded about 90% of the market share. Consequently, the arbitrators felt that the transaction would have resulted in higher prices for essential electronic goods that are a part and parcel of everyday life.
Chevron announced a sharp reduction in its projected 2016 capital spending budget. The company is expected to spend roughly $26.6 billion next year, about 24% lower than the anticipated 2015 expenditure.
Of the total amount, Chevron has allocated $24 billion for upstream operations − in the domestic and international markets. Most importantly, the majority of spending of about $18.6 billion will be directed toward international exploratory activities.
The Coca-Cola Company KO announced the signing of letters of intent with three U.S. bottlers — Coca-Cola Beverages Florida, Viking Coca-Cola Bottling Company and Coca-Cola Bottling Company United (“United”) — to grant expanded distribution territories in five U.S. states. The deals are subject to the companies reaching a definitive agreement.
While Tampa-based Coca-Cola Beverages Florida will get additional territories in south-eastern Florida, United will assume extra territories in north and central Georgia. Viking Coca-Cola Bottling Company will take more territories in parts of northern Minnesota.
Microsoft Corporation MSFT took a step closer to cross-platform dominance and boosted the company's Windows 10 push. It released its personal virtual assistant Cortana on competing platforms.
The digital assistant is now available as a downloadable app on Apple’s AAPL iOS, Alphabet’s GOOGL Android, and Cyanogen OS devices. It is available on devices running iOS 8 or Android 4.1.2 and can be downloaded from their respective app stores. As for Cyanogen OS-powered One Plus One Android phone, Cortana will be available later this month. Cortana apps will only be available in the U.S. and China at launch.
Wal-Mart Stores Inc. WMT unit in Puerto Rico has recently sued the island’s government over an increase in an import tax that would take away 91% of its profits on the island, as per Bloomberg.
As per Puerto Rico’s act (enacted in May), the tax rate has increased to 6.5% from 2%. This tax is levied on goods imported from offshore affiliates to local companies with gross revenues of more than $2.75 billion.
The move to increase the tax rate comes as the U.S. commonwealth struggles to restructure $70 billion in debt, more than every U.S. state but New York and California. This week, the U.S. Supreme Court agreed to consider reinstating a law that would let Puerto Rico’s debt-ridden public utilities restructure their obligations.
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 1.3%.
|
Ticker |
Last 5 Day’s Performance |
6-Month Performance |
|
GS |
-4.4% |
-14.5% |
|
MMM |
-0.3% |
-1% |
|
IBM |
-1.2% |
-19% |
|
BA |
-0.4% |
+3.4% |
|
AAPL |
-1.4% |
-9.9% |
|
UNH |
+1.7% |
-2% |
|
UTX |
-3% |
-20.1% |
|
HD |
-1.6% |
+19.4% |
|
TRV |
-3.4% |
+11.9% |
|
CVX |
-1.2% |
-12.3% |
Next Week’s Outlook
This week’s proceedings have been dominated by the continuing slump in oil prices. OPEC’s decision to maintain a production ceiling triggered the decline initially. This was followed by an unexpected increase in U.S. crude stockpiles and worrying data from China. These factors led to concerns about a widening supply demand gap.
It is difficult to predict whether oil will continue to have such an overarching impact on next week’s trading. However, a lasting effect is bound to remain. Meanwhile, several important reports are scheduled for release starting today. This includes data on retail sales, inflation, housing and industrial production. Good news on this front could outweigh the oil factor and help indices return to their winning ways in the days ahead.
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