The Dow has not had a kind year and is currently languishing in the red. Down 0.6% year to date, the blue-chip index has been dragged lower by multiple headwinds. A slump in oil prices, international crises combined with concerns over a Fed rate hike and a strengthening dollar weighed down on the markets.
The blue chip index was having trouble staying out of the red from the beginning of the year and was the only benchmark in the first quarter to end with losses. Throughout the first half, the major headwind for the markets was the economic crisis in Greece. The Dow failed to end in the green in the first half of the year amid high volatility, losing 1.1%.
However, the domestic economy has strengthened during the second half of the year, prompting the Fed to undertake a long awaited rate hike. International developments, particularly stimulus measures in China and the Eurozone have also boosted stocks. Over the last six months, the blue-chip index has managed to recoup some of its losses for the year and has increased 0.6%.
Monthly Performance
During January, the Dow plunged, losing 3.7%. The World Bank reduced its global economic growth outlook for 2015 and 2016. Continuous plunge in oil prices also dampened investor confidence. Political uncertainty in Greece and dismal domestic economic data added to investor concerns.
The Dow gained 5.6% in February posting its best monthly gain since Jan 2013. Benchmarks settled in the green for the month after an agreement on Greece’s bailout program boosted investor sentiment. However, the index declined 2% in March as investors remained concerned about multinationals’ first quarter earnings results due to the overall strength in the U.S. dollar.
The index rebounded in April, gaining 0.4%. China’s stimulus measures, prospects of Visa Inc. V gaining access to China and McDonald's Corp.’s MCD turnaround plans boosted the broader markets during this month. Gains continued into May with the index moving up 0.9%. Economic data was mixed, giving no clear indication on the timing of a rate hike.
The index lost 2.2% over June as uncertainty over Greece’s bailout program weighed on investor sentiment. The Dow rebounded in July, gaining 0.4%. Successful Greek debt negotiations, the Fed’s optimism about the economy helped boost the broader markets.
The Dow recorded its biggest monthly decline in more than five years in August, losing 6.6%. Markets slumped for the month on concerns that a weak Chinese economy would result in a global slowdown. Uncertainty about the timing of a Fed rate hike was another major cause of downfall. The index lost 1.5% in September due to weak Chinese and domestic economic data.
The index staged a major comeback in October, soaring 8.6%. Indications of more economic stimulus programs in the Eurozone and China helped benchmarks to end in positive territory for the month. The Dow has gained in November as well, increasing 0.3%. Stocks ended last month on a positive note, buoyed by gains in the financial and energy sectors.
Important Developments
Federal Reserve
Following relatively better economic data, particularly on the employment side, the Fed began signaling that it would undertake a rate hike. The exact timing of such a move kept investors on tenterhooks for most of the year, leading to severe losses on several occasions.
Ultimately on Dec 16, the Federal Reserve 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. Fed Chair Janet Yellen expressed confidence in the state of the economy but continued to voice concerns over inflation.
The Fed’s move to raise rates pointed to “solid” consumer spending, rebound in housing market and strong business fixed investment. The Fed increased its short-term borrowing rate to a range of 0.25% to 0.50%. Fed policy makers unanimously voted in favor of a rate hike. Separately, the policymakers projected 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.
Oil Price Slump
The slump in oil prices has plagued the broader markets for most of this year. This is primarily due to a widening demand supply gap. On one hand, the likes of Russia, the OPEC and the U.S. have refused to cut output. Meanwhile, demand has been a matter of great concern due to the economic situation in China. These factors have weighed on energy stocks throughout 2015.
Things came to a head when OPEC decided not to cut oil output at a meeting in Vienna. OPEC increased its production ceiling instead. The oil cartel said that in case it decided to cut output while other players continued to create a surfeit of supply, it will end up losing market share.
The price of U.S. crude had already been languishing below the $40 level per barrel. However, OPEC’s decision taken earlier this month dealt a body blow to the energy market and dragged West Texas Intermediate (WTI) crude price further below the $40-per-barrel mark.
Greece
The political situation in Greece worsened in December last year after Prime Minister Antonis Samaras announced presidential elections. This move came in after the country was given an additional two months to fulfill its bailout obligations by the ECB. In January, Samaras said a victory for Greece's anti-austerity, left-wing Syriza party may lead to the country’s exit from the European Union. This would be the result of a continual standoff over debt restructuring.
February began on a tense note after the ECB cancelled its acceptance of junk-rated Greek government debts as security for regular central bank loans. Later in the month, Germany dismissed Greece’s plea for bridge funding until the end of May.
After much heartburn for investors, Greece reached an agreement with its lenders on a bailout deal during the middle of July. Among other terms of the agreement, Greece needs to broaden its tax structure and improve the long-term sustainability of pension schemes.
China
China’s economy and financial markets suffered during a large part of 2015. Economic data remained weak through the year though markets soared during the first half of 2015. Ultimately, markets crashed over a two and a half month period, erasing nearly $5 trillion in value terms. A bubble had built up steadily and valuations had hit levels which were difficult to justify.
The underlying reason for the rout was a flagging economy. Domestic data has remained a matter of great concern for most of the year. The government has accepted the situation and is ready for a slower pace of growth. Besides providing monetary stimulus measures on several occasions and devaluing the yuan, reforms of government owned enterprises have been accelerated.
Markets have suffered repeatedly due to the state of China’s economy. Oil and commodity stocks have been the worst sufferers since the country is a major buyer of both oil and commodities. The fate of its economy continues to bother investors.
ECB Stimulus
Fears about weaknesses in the Eurozone’s economy have also plagued investors. In March, the European Central Bank (ECB) unveiled a 1 trillion euro ($1.1 trillion) bond-buying program. ECB will buy government bonds worth 60 billion euros a month through a quantitative easing program. The QE program will continue til Sep 2016.
In September, Draghi signaled the ECB would expand its quantitative easing program after ECB’s economists trimmed projections for Eurozone’s inflation and economic growth through 2017. However, when such measures were finally announced in December they did not match up to market expectations.
The ECB extended its asset purchasing program of 60 billion euro a month until Mar 2017 from Sep 2016. However, the ECB didn’t increase the size of the monthly purchases to the extent many investors were looking for.
Domestic Economic Data
Nonfarm Payroll Data
The economy created 257,000 new jobs in January, marking the 11th consecutive month in which the economy generated more than 200,000 jobs, its longest such stretch since 1994.
Meanwhile, the unemployment rate increased marginally to 5.7% in January from December’s rate of 5.6%, mainly due to a rise in labor participation rate. By August, the unemployment rate had declined to 5.1%, its lowest level since Apr 2008. The jobless rate remained unchanged at 5% in November since a sizeable portion of people began searching for work.
GDP
The year has witnessed a steady growth in GDP, though the current pace is far slower than the impressive growth witnessed in 2014. First quarter GDP increased only 0.6% as a harsh winter, cheaper oil prices and a stronger dollar upset the economy. Consumer spending fueled a strong pace of 3.9% in the second quarter.
However, growth in the third quarter left much to be desired. GDP has increased only by 2% during this period primarily due to a burgeoning trade deficit and a minute gain in inventories.
Top 3 Dow Performers on YTD Basis
Given below are the top 10 performers on YTD basis:
|
Ticker |
6-Month Performance |
YTD Performance |
|
NKE |
19% |
33.70% |
|
MCD |
26.30% |
28.10% |
|
GE |
17.70% |
23.80% |
|
MSFT |
28.10% |
21.70% |
|
V |
18% |
20.80% |
|
UNH |
-1.80% |
18.50% |
|
DIS |
-6.20% |
13.70% |
|
BA |
6.20% |
13.40% |
|
PG |
2.70% |
11.80% |
|
TRV |
19% |
8.70% |
Here is a short analysis of our current outlook for the top 3 performers:
NIKE, Inc.’s NKE second-quarter earnings per share of 90 cents surged nearly 22% year over year and outpaced the Zacks Consensus Estimate of 85 cents. Management reaffirmed its outlook, anticipating revenue growth in the mid-single-digit range for fiscal 2016, with gross margin expansion of about 50 bps.
Also, the company aims to increase its global reach and market share by expanding its operations in the emerging markets while focusing on digital development, DTC business and other brands.
Nike holds a Zacks Rank #3 (Hold) and has expected earnings growth of 15.1% for the current year.
McDonald's reported third quarter earnings of $1.40, exceeding the Zacks Consensus Estimate of $1.27 per share. McDonald’s has delivered positive earnings surprises in all the trailing four quarters and has an average positive earnings surprise of 4.96%.
McDonald’s has historically enjoyed moderate growth prospects with its exposure to under-penetrated international markets. Based on its efforts, the company expects to post positive comps in the third quarter.
Apart from a Zacks Rank #3 (Hold), the company’s price to earnings ratio is 24.35, lower than the industry average of 25.55 . The company has expected earnings growth of 2.1% over the next quarter.
General Electric Company’s GE third quarter 2015 operating earnings of 32 cents exceeded the Zacks Consensus Estimate of 26 cents. The company continues to expect double-digit Industrial operating EPS growth and expects the industrial operating EPS to be within $1.13-$1.20 per share.
The company is restructuring its portfolio by divesting most of the GE Capital assets in order to redefine itself as a core industrial entity. The company remains well on track to close asset sale transactions of $100 billion by the end of this year.
GE holds a Zacks Rank #3 (Hold) and has an expected earnings growth of 16.7% for next year, higher than the industry average of 7.1%.
Outlook for 2015
Historical trends have shown that December is usually a beneficial month for investors. However, the continuing slump in oil has plagued markets throughout the month. A slight uptrend has helped stocks move upward during certain sessions. On the other hand, any negative news on this front has pushed stocks lower.
Ultimately, how the domestic economy reacts to gradual rate hikes will determine the fate of stocks going forward. The Fed has said that it will determine future rate increases depending on the state of the economy. In case the economy has enough strength to ward off international economic worries, a series of rate hikes will continue. Meanwhile, the dollar continues to strengthen and may continue to impact earnings results, especially those of multinational corporations going forward.
Meanwhile, several analysts project that volatility will increase going forward. This is because foreign economies will ease monetary conditions while the Fed undertakes tightening measures. If markets have the inherent strength to withstand such pressures and domestic economic data continues to improve, markets may once again return to their winning ways.
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