The Dow experienced a volatile week, rising and falling on an equal number of days. The blue-chip index ended in the green on Monday, boosted by mergers and acquisition activity, and gains in industrial and technology stocks.
The Dow slumped on Tuesday as rate hike fears strengthened the U.S. dollar to a multi-year high against major currencies including the euro. The blue-chip index extended these losses into Wednesday as investors remained concerned about the possibility of a mid-year interest rate hike.
The Dow rebounded on Thursday as mixed economic data reduced fears about a sooner-than-expected rate hike. The Dow has gained 0.2% during the first four trading days.
Last Week’s Performance
Last Friday, the Dow declined more than 1.5% as upbeat nonfarm payroll data reignited fears about a sooner-than-expected interest rate hike. The U.S. economy created a total of 295,000 jobs in February, beating the consensus estimate of 235,000. Moreover, the unemployment rate went down to six and a half year low figure of 5.5% in February from 5.7% the month before, which is also down from 6.7% in Feb 2014.
Strong jobs data had a negative impact on investor sentiment as it raised the possibility of a sooner-than-expected rate hike. Analysts speculated that the Fed may opt for an earlier-than-estimated rate hike in this favorable environment. Meanwhile, oil prices dropped again as strong U.S. job data boosted the U.S. dollar.
Benchmarks finished in the red for the second consecutive week. The blue-chip index lost 1.5% over last week. Stocks had started the previous week on a positive mood as the Nasdaq closed above the 5000 mark for the first time since Mar 2000. Encouraging deal news also boosted markets.
Markets were also aided later by the European Central Bank (ECB) after it announced a 1 trillion euro ($1.1 trillion) bond-buying program. Moreover, interest cuts in China also had positive impact on markets.
However, dismal monthly car sales and disappointing economic data including the ISM Manufacturing Index, personal consumption expenditure, construction spending, initial claims and factory orders dented investor sentiment. Separately, Israeli Prime Minister Benjamin Netanyahu’s warning over the attempts of a White House-Iran’s nuclear deal also impacted sentiment.
The Dow This Week
Markets rebounded to the green on Monday, the sixth anniversary of the bull market. Stocks received a boost from mergers and acquisition activity, and gains in industrial and technology stocks. Investors also found a buying opportunity after the sell-off last week.
The day was devoid of any major events, except for the news of a couple of merger and acquisition activity. Alcoa Inc. AA created a stir in the trading activity after announcing that it is acquiring titanium supplier RTI International Metals, Inc. RTI in a transaction valued at $1.5 billion.
Separately, in a deal that would combine two of the biggest mall operators in the US, Simon Property Group Inc. SPG offered to buy competitor The Macerich Co. MAC for $14.39 billion. The blue-chip index gained 0.8%.
The Dow slumped 1.9% on Tuesday as rate hike fears strengthened the U.S. dollar to a multi-year high against major currencies including the euro. The euro plunged to its lowest level in almost 12 years. Meanwhile, the European Central Bank’s (ECB) quantitative easing program that got underway on Monday also weighed on the euro.
Last week’s strong U.S. job numbers injected fears among investors that the Fed may raise interest rate sooner-than-expected. Additionally, strengthening U.S. dollar also weighed on oil prices. The blue-chip index witnessed its biggest one-day loss in five months in terms of points.
Stocks extended Tuesday’s losses to end in negative territory on Wednesday as investors remained concerned about the possibility of a mid-year interest rate hike. Speculations are steadily rising that the Fed will consider a rate hike in June banking on improving labor market conditions. Analysts are also expecting that the Fed will start the rate hike process by dropping the ‘patient’ phrase after the upcoming Federal Open Market Committee (FOMC) meeting.
Moreover, U.S. dollar continued to gain strength against euro and its other rivals. The euro declined further to trade below $1.06 on Wednesday, reaching its lowest level since 2003. Continuous decline in euro raised the possibility that the two currencies are moving toward parity in the not-too-distant future. The Dow lost nearly 0.2%.
The Dow jumped 1.5% on Thursday as mixed economic data reduced fears about sooner-than-expected rate hike. Retail sales declined 0.6% in February compared to the consensus estimate of 0.3% rise. February’s decline was preceded by 0.8% drop in January and 0.9% decline in December. This is the first time since 2012 that retail sales have declined for three-straight months.
Separately, the U.S. Department of Labor reported that initial claims declined in the week ending Mar 7 after hitting 10-month high last week. Mixed economic data put the brakes on dollar rally yesterday. Meanwhile, financial stocks posted solid gains after Fed’s stress tests. However, decline in energy shares following oil price slump limited some of yesterday’s gains.
Components Moving the Index
Apple Inc. AAPL will join the exclusive Dow Jones Industrial Average later this month. Apple will replace telecommunications giant AT&T Inc. T, according to S&P Dow Jones Indices, the unit of McGraw Hill Financial Inc. MHFI that owns the Dow. AT&T has been part of the Dow since 1916.
The addition of Apple will not affect the value of the Dow, which has increased 1.8% this year, and has hit over 90 record closes in the past 2 years. Apple will join the Dow at the end of trading on Mar 18.
AT&T is being replaced after falling 4.5% in 2014. This change-up is also due to the upcoming 4-for-1 stock split by Dow member Visa Inc. V, according to S&P Dow Jones Indices. The split by Visa would sharply decrease the index’s technology weighting—as the Dow is price weighted—if not for the inclusion of Apple.
Intel Corporation’s INTC shares declined 4.7% on Thursday after forecasting first quarter revenues of around $12.8 billion, down from its previous guidance of about $13.7 billion.
Meanwhile, According to VentureBeat reports, chipmaker Intel will supply wireless modem chips for some of Apple’s iPhones produced in 2016, signifying a partial replacement of Qualcomm’s QCOM wireless chips which Apple had used in the past.
The Goldman Sachs Group, Inc. GS plans to offer 6 million shares in the initial public offering of its specialty lending unit – Goldman Sachs BDC Inc. The financial bigwig said that it will list the unit’s shares on the New York Stock Exchange, under the ticker symbol “GSBD.”
The company also plans to offer an overallotment option to the underwriters, which will allow underwriters to buy up to an additional 900,000 shares of common stock. As per a filing of the company, the price per share is expected in the range of $20–$21, which is likely to raise $123 million at the midpoint.
Goldman Sachs BDC intends to utilize the proceeds of the offering for repaying a part of its debt under senior secured revolving credit facility. Formed in 2012, Goldman Sachs BDC is a business development company investing mainly in middle-market companies in the country.
American Express Co. AXP (AmEx) has now obtained consent to hike its dividend by 12% and buy back shares worth $6.6 billion in the last three quarters of 2015 and through the first quarter of 2016. The company aims to repurchase shares for about $1 billion in the first quarter of 2015.
AmEx had exceeded its buyback target of $4.4 billion shares in 2014. The company distributed approximately 95% of the capital generated in fourth-quarter 2014 to its shareholders through dividend payouts and share repurchases. While maintaining healthy capital ratios and over 25% of return on equity (29% at 2014-end), management aims to pay out more than 50% to investors through dividends and share buybacks.
Notably, AmEx intends to amplify its regular quarterly dividend payout by 11.5% to 29 cents per share from the current 26 cents, pending approval from its board of directors. The current payout was increased from 23 cents in May 2014.
The Boeing Company BA declared that it has acquired a stake in SoftBank Satellite Planning Corp. The joint venture aims to develop a satellite-based disaster response communications system for Japan. SoftBank will then analyze the developed concepts for the satellite-based system and propose the same to the Japan’s Ministry of Internal Affairs and Communications.
Chevron Corporation CVX has decided to accelerate its asset divestment program and lower cost. Chevron is planning to divest $15 billion worth assets through 2017, 50% higher than the prior target of $10 billion. The company is also willing to lower its 2015 capital expenditure by 13% to $35 billion from $40 billion invested during 2014.
General Electric Company’s GE CEO Jeff Immelt is likely to resign within a year, handing over his responsibilities to Jeff Bornstein. Bornstein is the present CFO and the “obvious successor.”
Additionally, the company’s unit GE Ventures and health care firm Stanford Health Care recently announced the launch of Evidation Health, an organization committed to improving health outcomes with evidence-based digital medicine.
United Technologies Corporation UTX announced that it is contemplating strategic alternatives for its Sikorsky helicopter unit, in the first significant move by the company's new chief executive officer Gregory Hayes to revamp the conglomerate's portfolio.
The company's board authorized the review process, which is expected to conclude before the end of this year. The conglomerate made special mention of a potential tax-free spin-off of the helicopter unit being in the cards. Sikorsky, which generates about two-thirds of its sales from U.S. defense contracts, did not measure up to the performance of the other units of the company, according to Hayes.
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 |
|
V |
-0.6% |
+26% |
|
IBM |
-2% |
-17.4% |
|
GS |
-0.1% |
+3.7% |
|
MMM |
-1.9% |
+14.2% |
|
BA |
-1.6% |
+19.8% |
|
CVX |
-2.2% |
-16.5% |
|
UTX |
+0.4% |
+11.9% |
|
XOM |
-2.9% |
-12.1% |
|
MCD |
-2.9% |
+3.1% |
|
CAT |
-1.6% |
-23.6% |
Next Week’s Outlook
Rate hike fears and a consequently stronger dollar have taken center stage this week. But for Monday, concerns arising out of these factors have determined market movement on all other days. Meanwhile, ECB action has weakened the euro, heightening the effect of a stronger dollar. Oil prices have also been weighed down by the ascent of the dollar.
Economic reports have also determined the movement of stocks to a significant degree. Several important reports are scheduled for release this week. This includes reports on industrial production, housing permits, leading indicators and jobless claims. They could well determine the degree to which rate hike concerns impact stocks. At the same time, stocks will possibly continue to experience significant volatility in the days ahead.
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