The Dow mopped up gains over most of the week following a rebound in oil prices and a positive response to the Fed’s rate hike. The index gained on Monday following a rebound in the U.S. crude oil price. The Dow increased again on Tuesday, led by gains in energy and financial shares. The index gained for the third successive day on Wednesday after Fed policy makers unanimously voted to raise interest rates. The Dow moved lower on Thursday, led by declines in energy and materials shares, primarily because of a fall in oil prices. The Dow gained 1.4% during the first four trading days.
Last Week’s Performance
Last Friday, the Dow dropped 309.54 points or 1.8%, dragged down by a decline in energy shares due to a further slump in oil prices. Crude oil prices spiraled down after the International Energy Administration (IEA) said abundant supply of oil will persist till next year even though demand for oil continues to decline. Price of WTI crude oil dropped 3.2% to $35.62 a barrel on Friday.
For the week, WTI crude oil declined 10.9%, its largest weekly loss since the week ended Dec 12, 2014. Meanwhile, price of Brent crude oil declined 4.8% to $37.93 a barrel on Friday, its lowest settlement price since Dec 2008. Brent crude oil declined 11.8% over last week.
Energy shares took a beating due to a drop in oil prices. Dow components Exxon Mobil Corporation XOM and Chevron Corporation CVX declined 1.8% and 3.2%, respectively.
An abrupt closure of a high-profile junk bond mutual fund also added to the bearish sentiment. The Third Avenue Management LLC liquidated the $789 million Third Avenue Focused Credit Fund. As a result, investors were prevented from withdrawing money that they had invested in the fund. U.S. junk bonds registered their biggest decline since 2011 raising concerns that a six-year bull market for stocks is nearing its end.
For the week, the index lost 3.3%. Benchmarks ended the week in the red due to declines in energy and material shares. Continuous decline in oil prices had a negative impact on energy shares.
Meanwhile, China’s discouraging trade data reignited fears of a global slowdown, which intensified downward pressure on material stocks. Separately, declines in technology and consumer discretionary shares also weighed on the broader markets.
The Dow This Week
The index gained 0.6% on Monday following a rebound in the U.S. crude oil price. U.S. crude oil price erased early losses on Monday to end in positive territory as traders who had bet on lower prices booked profits. WTI crude oil prices temporarily dropped below $35 a barrel, but bounced back 1.9% to close at $36.31 a barrel. Exxon Mobil and Chevron advanced 2.3% and 3.3%, respectively.
Moreover, investors chose to play safe by investing in consumer staples stocks. This boosted the broader markets and The Procter & Gamble Company PG and The Coca-Cola Company KO increased 0.7% and 0.4%, respectively. However, investors remained concerned about junk bonds which continued to experience a selloff.
The Dow increased 0.9% on Tuesday, led by gains in energy and financial shares. U.S. crude oil price continued to rebound from a near seven-year low hit on expectations that U.S. crude inventories declined last week. According to The Wall Street Journal, the U.S. EIA was likely to report a decline in crude supplies by 1.4 million barrels for the week ending Dec 11 on Wednesday.
Separately, pricing agency Platts predicted that U.S. crude inventories would decline by 2.5 million barrels for the same period. Meanwhile, Congress is expected to lift a 40-year old ban on oil exports. WTI crude oil price increased for the second consecutive day on Tuesday, gaining 2.8% to settle at $37.35 a barrel. Exxon Mobil and Chevron advanced 4.5% and 3.8%, respectively.
The possibility of a rate hike had a positive impact on the financial sector. Financial shares moved upward and Dow component JPMorgan Chase & Co. JPM increased 2.9%. Meanwhile, CPI remained unchanged in November, following a 0.2% increase in October.
The index gained 224.18 points or 1.3% on Wednesday after Fed policy makers unanimously voted to raise interest rates. The central bank raised its key interest rate for the first time in nearly a decade. The Fed said that the U.S. economy will continue to do well and a slight increase in rate was appropriate. Policymakers forecast the rate to move up to 1.375% by the end of 2016. Meanwhile, the Fed stressed that the pace of rate hikes will be ‘gradual’ in nature.
Defensive stocks including utility stocks rallied the most in nine months, banking on the Fed’s signal that the rate hike was a tentative beginning to a “gradual” tightening cycle. However, the Fed’s move to raise rates was widely telegraphed and has been largely priced in by the bourses.
Meanwhile, industrial production fell 0.6% in November after decreasing 0.4% in October. On the other hand, building permits surged 11% in November to hit a five-month high. Additionally, housing starts soared 10.5%.
The Dow dropped 253.25 points or 1.4% on Thursday, led by declines in energy and materials shares. Oil prices ended lower due to an unexpected rise in U.S. crude inventories. According to the EIA, crude supplies for the week ending Dec 11, increased by 4.8 million barrels. On the other hand, pricing agency Platts had forecast a decrease by 2.5 million barrels.
Meanwhile, the dollar strengthened against most of the major currencies following the Federal Reserve’s decision to hike benchmark interest rates in nearly a decade. A stronger dollar also intensified the downward pressure on oil prices. The WTI crude oil price fell 1.6% to end at $34.95 a barrel, its lowest settlement price since Feb 2009.
Components Moving the Index
Boeing Co. BA boosted its quarterly dividend by 20% and raised its stock-repurchase plan to $14 billion to let investors share certain benefits of soaring airliner deliveries. Shares of Boeing gained more than 1% after the announcement on Dec 14 and have added 10.02% so far this year.
Boeing’s quarterly dividend payout increased to $1.09 per share from 91 cents paid earlier. The company will pay the raised dividend on Mar 4, to stockholders on record as of Feb 12, 2016.
The company also said that it has finished its stock repurchases for 2015. The company has spent $6.75 billion out of the original $12 billion authorization announced last December and has currently $5.25 billion left. Notably, the latest increase takes the approved total to $14 billion.
United Technologies Corp. UTX recently offered a healthy guidance for 2016 and revised its outlook for 2015 as it completed the sale of its helicopter business – Sikorsky Aircraft Corp. At the same time, the company announced a $1.5 billion multi-year restructuring plan to improve its profitability through stringent cost-cutting initiatives.
Last month, United Technologies closed the divesture of Sikorsky to Lockheed Martin Corporation LMT for $9 billion. United Technologies expects to record $3.3 billion as an after-tax gain from the transaction in fourth-quarter 2015. The company also announced that it had initiated an accelerated share repurchase program to return $6 billion to its shareholders.
Consequently, the company revised its earnings guidance for 2015. United Technologies currently expects adjusted earnings for 2015 in the range of $6.20 to $6.30 per share. For 2016, the company expects adjusted earnings in the range of $6.30 to $6.60 per share on revenues of $56 billion to $58 billion with an organic growth of 1–3%.
In order to improve its margins, United Technologies will further implement a $1.5 billion multi-year restructuring program to reduce costs in high-cost locations, resulting in $900 million of annualized savings through 2018. Restructuring charges in 2015 are currently expected to be approximately $400 million, up from the prior expectation of $300 million.
General Electric Company GE inked a definitive agreement to sell its commercial lending and leasing business in Japan to the leasing arm of Sumitomo Mitsui Financial Group SMFG for about $4.8 billion.
Sumitomo Mitsui Finance and Leasing will acquire GE's commercial lending and leasing business in Japan, including capital finance, fleet service and vendor finance. The total assets sold are worth about $4.2 billion.
The offloaded business represented about $4.6 billion in ENI (Ending Net Investment). Subject to customary closing conditions, the sale is expected to close in April 2016. Upon completion, the deal will likely contribute about $600 million toward GE’s targeted dividend of $35 billion under the divestment plan.
3M Company MMM recently lowered its guidance for 2015, citing weak macroeconomic conditions across the globe. Share prices reacted sharply to the news as the stock was down 6% to close at $148.13 on Dec 15, 2015. However, the company offered some respite from the skepticism evident among investors through a relatively healthy initial guidance for 2016.
3M currently expects organic growth in 2015 to be approximately 1% versus the prior guidance of 1.5–2%. GAAP earnings are anticipated to be approximately $7.55 per share, down from earlier expectation of $7.60 to $7.65.
For 2016, the company anticipates GAAP earnings in the range of $8.10 to $8.45 per share, a year-over-year increase of 7–12%. Organic local-currency sales growth is expected to be 1–3%, while free cash flow conversion rate is anticipated at 95–105%.
Merck & Co. Inc. MRK and Eli Lilly and Company LLY announced yet another immuno-oncology collaboration – the companies expanded their existing immuno-oncology tie-up under which Merck’s Keytruda will be evaluated in combination with Eli Lilly’s abemaciclib in a phase I study across multiple tumor types. On the basis of phase I study results, the collaboration will advance into phase II studies in patients who have been diagnosed with either metastatic breast cancer or non-small cell lung cancer (NSCLC).
While financial details of the agreement were undisclosed, it was announced that the phase I study and subsequent phase II studies, if any, will be sponsored by Eli Lilly. Enrollment is scheduled to commence in early 2016.
Pfizer Inc. PFE announced that its supplemental New Drug Application for breast cancer drug, Ibrance, will be reviewed on a priority basis by the FDA. This means that a response should be out by Apr 2016.
Pfizer is looking to include data from the PALOMA-3 study in Ibrance’s label. The phase III PALOMA-3 study evaluated Ibrance plus AstraZeneca’s AZN Faslodex (fulvestrant) versus Faslodex plus placebo in women with HR+/HER2- metastatic breast cancer whose disease progressed after an endocrine therapy, including those with and without prior treatment for their metastatic disease.
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 lost nearly 2%
|
Ticker |
Last 5 Day’s Performance |
6-Month Performance |
|
GS |
-3.9% |
-14.2% |
|
MMM |
-5.9% |
-5.2% |
|
IBM |
-2.6% |
-18.2% |
|
BA |
-2% |
+1.5% |
|
AAPL |
-6.2% |
-14.4% |
|
UNH |
+1.3% |
-0.4% |
|
UTX |
-1.9% |
-18.4% |
|
HD |
-2.3% |
+18.9% |
|
TRV |
-0.7% |
+13.5% |
|
CVX |
+1% |
-9.2% |
Next Week’s Outlook
Oil prices have guided markets once again this week. This has occurred despite the fact that this week witnessed the biggest economic announcement in several years. Markets provided a warm welcome to the Fed’s rate hike call. However, this move was not without some disagreement, albeit predictable outcomes.
A subsequent surge in the dollar has placed further downward pressure on oil prices. This means that the oil slump is likely to continue in the days ahead. Economic data had a limited impact this week. But things could be different in the days to follow.
Starting with GDP numbers, several crucial reports are scheduled for release next week. This includes durable orders, personal spending and new home sales. Positive indications on this front could outweigh the oil factor and help markets move upward once again.
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