Category Archives: Dow Jones Industrial Average

Market reacts to French election, tax cuts and earnings

The stock market had two back-to-back days with the Dow Jones Industrial Average (DJIA) up over 200 points.  On Monday the market was reacting to the first round of elections in France.

The French election for President is often a two step process.  If a candidate gets over 50% of the vote in the first round of voting he or she is declared the winner and becomes President.  If no one gets to 50%, the two top vote getters face a run-off election which decides the Presidency.

In the first round that just ended, the candidates of the major French parties that had run the country for decades did not make it to the run-off.  Instead, Marine Le Pen (usually described as “Far Right”) and Emmanuel Macron (usually described as a “centrist”) were the two top vote getters.  They will face off on May 7th with the winner becoming President of France.

Macron, age 39, received 23.8% of the vote while Le Pen scooped up 21.4%.  Macron formed his own party, splitting off from the Socialists.  Macron is best known for marrying his teacher, a woman 25 years his senior.

It is generally assumed that Macron will win the next round with the French establishment uniting against Le Pen who wants to stop immigration and wants France to pull out of the EU.  The results of the balloting caused a relief rally in expectation that France will stay the current course and remain in the EU.

The Tuesday market action was driven by exuberance over the Trump administration announcement that they were proposing a reduction in the corporate tax rate from 35% to 15%.  If this passes, next year’s corporate earnings would be higher.

On the earnings front some of the big names in the DJIA reported better-than-expected earnings.  Caterpillar, McDonald, Du Pont and Goldman Sachs were the biggest beneficiaries.

Stay tuned.

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Dow Breaks the 20,000 level

The Dow Jones Industrial Average reached another milestone today.  The Dow broke through 20,000 as traders cheered.

For a little perspective here’s how the market reached past milestones.

dow-jones-milestones

A few points to remember.  There have been long periods when the Dow treated investors like riders on a roller coaster:  lots of swoops and slides only to end up where you began.  During those periods people made money with astute stock selection, not by buying “Mr. Market.”  We believe that those times will come again.

  • It took from 1929 to 1954 for the Dow to regain its previous high.
  • It took ten years – from 1972 to 1982 – for the market to break through the 1,000 level.

Keep in mind that the 1,000 point move in the Dow at the current level is just a little over 5% and is therefore not nearly as meaningful as a move from 1,000 to 2,000, a move of 100%.  But it’s still an important psychological barrier that had to be broken for the market to move higher.

The move makes sense from both a technical and fundamental standpoint.  Both retail and institutional investors are positive, as we have noted in the past.

The incoming Trump administration has moved with amazing speed to demonstrate their desire to increase the level of economic growth as a way of increasing job and wage growth.  They have expressed policy preferences for lower taxes, reducing regulations that stifle business development, and have been encouraging companies to build their businesses in the United States rather than overseas.

The trend is clear.  The only thing that could derail this train is a massive change in consumer sentiment or an external factor such as a war or other calamity.  The latter are known as “Black Swan” events and we must always keep in mind that they can occur.  We manage our portfolios with those possibilities in mind.

Eventually, valuations will get too high and the inevitable correction will occur.  In the meantime, we enjoy the ride while keeping a close eye on events.

Market Perspectives and Outlook

In 2016, the general election dominated the news headlines while the economy continued its slow slog for most of the year.

Stocks began the year in a slump, losing 10% in the first six weeks and then meandering sideways until July.  The markets rallied in the third quarter, followed by another decline until the election.  That’s when Trump’s surprising win started a rally that has carried the market to nearly 20,000 on the Dow.

dji_chart1

U.S. equities have held their gains since the election, while definitive sector rotations indicate more confidence among investors.  We believe the bull market will continue, although the sharp gains seen recently may give way to more sideways movement and/or potential pullbacks.

Improving economic data alongside a perception that the incoming Trump administration will be more business-friendly has bolstered both stock and Treasury yields.

The Federal Reserve raised interest rates in December and indicated that they expect further rate increases in 2017.

While it remains to be seen how much of Trump’s populist agenda will be embraced by the Republican Congress, a survey of 177 fund managers the week following the elections found they were putting cash to work  at the fastest pace since August 2009.

We always want to be good stewards of our client assets.  As such, we are participating in the market’s growth while at the same time remaining aware that the future holds many uncertainties, especially with the change in government direction and policy as we head into 2017.

As always, we value our relationship with you and welcome your comments and suggestions.

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Dow 20,000? Not so Fast!

The “Trump Rally” has generated a lot of enthusiasm in the investing community.  Despite the cheerleading for the Dow to break through 20,000 before year-end, the market is meandering tantalizingly below that level.

We write this around noon on Wednesday, December 28th, and anything can happen between now and the end of the week.  There is, however, another factor in play that may keep the rally from breaking that magic number in 2016: pension fund rebalancing.

Pension funds have to have a balance between stocks and bonds to meet their risk tolerance targets and investment obligations.  That means as stocks go higher and tilt the portfolio weighting, pension funds will have to sell some of their stock holdings and buy bonds.

Jim Brown at Option Investor wrote this:

The pension fund rebalance for the end of December could see between $38 and $58 billion in equities sold according to Credit Suisse.  Stocks have rallied so much since the election the pension funds have to sell stocks and buy bonds to bring their mandatory ratios back into balance.  That suggests Thursday/Friday should have a negative bias.  Normal volume will be very low so that means even $38 billion in fund selling could have a significant impact.

This helps explain why the market seems to be stuck in neutral so far this week, and why it may stay that way until January.

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The New Trump Economy

We have been talking about the “Plow Horse Economy” for quite a while now.  Low interest rates designed to spur economic growth have been offset by other government policies that have acted as a “Plow” holding the economy back.

Market watchers have assumed that the November election would see a continuation of those policies.  The general prediction was for slow growth, falling corporate profits, a possible deflationary spiral, and flat yield curves.

What a difference a week makes.  The market shocked political prognosticators by standing those expectations on their heads.

Bank of America surveyed 177 fund managers in the week following the elections who say they’re putting cash to work this month at the fastest pace since August 2009.

The U.S. election result is “seen as unambiguously positive for nominal GDP,” writes Bank of America Merrill Lynch Chief Investment Strategist Michael Hartnett, in a note accompanying the monthly survey. 

The stock market has reached several new all-time highs, moving the DJIA to a record 18,924 on November 15th, up 3.6% in one week.

Interest rates on the benchmark 10-year US Treasury bond have risen from 1.83% on November 7th to 2.25% today (November 17th), a 23% increase.  Expectations for the yield curve to steepen — in other words, for the gap between short and long-term rates to widen — saw their biggest monthly jump on record.

 WealthManagement.com says that

Global growth and inflation expectations are also tracking the ascent of Trump. The net share of fund managers expecting a stronger economy nearly doubled from last month’s reading, while those surveyed are the most bullish on the prospect of a pick-up in inflation since June 2004.

Investors are now also more optimistic about profit growth than they have been in 15 months.

Whether this new-found optimism is justified is something that only time will tell.  In the meantime to US market is reacting well to Trump’s plans for tax cuts and infrastructure spending.  Spending on roads, bridges and other parts of the infrastructure has been part of Trump’s platform since he entered the race for President.  It’s the tax reform that could be the key to a new economic stimulus.

According to CNBC American corporations are holding $2.5 trillion dollars in cash overseas. That’s equal to 14% of the US gross domestic product.  If companies bring that back to the US it would be taxed at the current corporate tax rate of 35%.  The US has the highest corporate tax rate in the world.  The promise of lower corporate tax rates – Trump has spoken of 15% – could spur the repatriation of that cash to the US, giving a big boost to a slow growth US economy.

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Dogs of the Dow Revisited

The “Dogs of the Dow” are the ten highest yielding stocks in the Dow Jones Industrial Average.  The reason they were referred to as “Dogs” is because stocks with unusually high dividend yields are often stocks whose prices have dropped, sometimes dramatically, because of bad news.

American companies, unlike their European counterparts, try to keep their dividends steady or increase them over time.  If they run into problems, including earnings declines, reducing the quarterly dividend is usually the last step.

To give an example, if a company whose stock which is priced at $100 per share pays a $2.50 dividend it is said to have a 2.5% yield.   If the company runs into problems and its share price drops to $50, the dividend yield is now 5.0%.  Thus it becomes a “Dog.”

Most companies run into problems from time to time: sales slow down and investors sell to invest in the next new thing.  That’s what happened to McDonalds a few years ago.  When oil prices dropped sharply so did the price of oil company stocks.  When natural resources prices dropped because of reduced demand so did the price of companies like Caterpillar which makes mining equipment.  Technology goes in and out of favor for various reasons and so does the price of tech stocks.

But most companies learn how to cope with adversity and make the appropriate changes to make a comeback.  That’s what often happens and it provides a way for investors to buy companies when they are cheap and make a profit.

The Dogs of the  Dow are a method of creating a portfolio of high yielding but out-of-favor stocks in the expectation that most will recover and provide a nice profit.

 So how have the “Dogs” done over the past 5 years?  We have tracked the performance of the “Dogs” using the share prices and yields of the 10 highest yielding DJIA stocks as of the last trading day of the previous year.  Here are the results:

  • 2011          16.4%
  • 2012          10.1%
  • 2013          19.1%
  • 2014         10.6%
  • 2015           2.9%

These returns are “total returns” and include dividends but do not include fees or expenses.  It should also be noted to these returns are different if the starting point was not the value as of the end of the prior year and the ending point was different.  It should also be noted that a 10 stock portfolio is not properly diversified and I have simplified the process of buying, trading and balancing the “Dogs.”

As a final note, this strategy was popular in the 1990s and as it became more popular it became less effective.  In addition, as technology stocks gained popularity in the late 1990s, the “Dogs of the Dow” lost money as investors moved massively away from old-line DJIA stocks and into the tech sector.  As they say in the prospectuses, past performance is no guarantee of future results.

For more information, contact us.

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Global Stocks Lower After Brussels Explosions

Major Stock Indexes

4:09 PM EDT 3/22/2016

Last Change % CHG
DJIA 17582.57 -41.30 -0.23%
Nasdaq 4821.66 12.79 0.27%
S&P 500 2049.80 -1.80 -0.09%
Russell 2000 1096.95 -1.63 -0.15%
Global Dow 2315.94 -7.42 -0.32%
Japan: Nikkei 225 17048.55 323.74 1.94%
Stoxx Europe 600 340.30 -0.52 -0.15%
UK: FTSE 100 6192.74 8.16 0.13%

 

Currencies

4:09 PM EDT 3/22/2016

last(mid) change
Euro (EUR/USD) 1.1224 -0.0018
Yen (USD/JPY) 112.28 0.33
Pound (GBP/USD) 1.4214 -0.0154
Australia $ (AUD/USD) 0.7623 0.0045
Swiss Franc (USD/CHF) 0.9724 0.0025
WSJ Dollar Index 87.26 0.10

Futures

3:59 PM EDT 3/22/2016

last change % chg
Crude Oil 41.48 -0.04 -0.10%
Brent Crude 42.54 0.31 0.73%
Gold 1248.5 4.3 0.35%
Silver 15.895 0.048 0.30%
E-mini DJIA 17497 -31 -0.18%
E-mini S&P 500 2041.75 -1.00 -0.05%

Government Bonds

4:08 PM EDT 3/22/2016

price chg yield
U.S. 10 Year -6/32 1.939
German 10 Year 7/32 0.215
Japan 10 Year 3/32 -0.101
 
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A quick market roundup – January 22, 2016 @ 10:00 AM

January 2016 has been challenging for investors. The DJIA had been down about 8% year-to-date. But even as we post this there is a major relief rally going on across the globe.

European Central Bank President Mario Draghi hinted at more stimulus at the World Economic Forum in Davos, Switzerland, saying that he had “plenty of instruments” and was willing to use them.

The price of oil has bounced around wildly, starting the year at $37.95, dropping as low as $28.35 (a 25% drop) before rebounding. It’s up to $31.57 as we write, up over 6% just today. This despite an excess of supply.

Oil is causing problems for Venezuela with a $120 billion in foreign debt. The country gets 96% of its export earnings from oil and is facing both an economic and political crisis.  This could have an impact on foreign banks that have lent them money.

All this is going on while a massive winter storm is barreling toward the Mid-Atlantic and Northeast. An inch of snow snarled traffic so badly in Washington DC yesterday that many abandoned their cars and some slept in hospitals, unable to get home.  The storm that’s in the forecast has already shut down a great deal of air traffic in the region.

Have a safe weekend.

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A Reflection on Risk

The beginning of 2016 was, we are told, the worst first week of the year in the history of the stock market. How bad was it? The DJIA was down -6.13%. While there’s no denying that it was an incredibly unpleasant start to the year, in a broader sense the magnitude of the decline is not unprecedented when you consider that since 1997 we have had 6 single-day drops that have been larger than that. In fact, during our own investment career we’ve experienced much worse. Some of you will remember October 19th, 1987, the day that the market dropped 22.6%. In one day. Within 14 months of that day, the market had recouped all of its losses, and then went on to far greater heights (remember the bull markets of the 1990s?).

However, extreme market volatility usually causes people – especially those who have been complacent, or who have not paid attention to the amount of risk they are taking – to let emotion take over and cloud their thinking. The price of oil has plummeted in the last year, and while that has been great news at the pump, it has caused the majority of oil-related stocks to decline. Railroad stocks have come under pressure as coal shipments have declined. Technology stocks have been affected by a cutback in production of Apple phones.

We are not in the business of predicting the future. However, we will say that we have faith in the strength of free enterprise to overcome economic obstacles. We are in the business of creating diversified portfolios designed to reduce risk so that whatever market conditions we may face, we will be able to take advantage of market advances and cushion market declines.

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The Dogs of the Dow

The “Dogs” are the ten stocks in the Dow Jones Industrial Average (DJIA) that have the highest dividend yield. They are referred to as Dogs because the stocks with the highest yields are often those that are out of favor with investors and whose prices have declined significantly.

The Dow is made up of 30 stocks that are leaders in their industry.  They are generally though of as “Blue Chips.”  All of the stocks in the DJIA pay a dividend. Their yield is determined by dividing their annual dividend by the stock price. For example, as of December 31, 2014, AT&T was one of the 30 stocks in the DJIA. At that time it had an annual dividend of $1.84 and was priced at $33.59. Dividing $1.88 by $33.59 gives us a dividend yield of 5.48%, making it the highest yielding stock in the DJIA.

One of the reasons for the high yield is that AT&T declined in price by about 4.5% in 2014 while keeping its dividend level.  70%  of the other Dogs of 2015 also declined in price while keeping dividends level. In fact, seven out of the ten actually raised their dividends even as their prices declined.

This price drop coincided with an over-all market increase of over 10%.  For the smart investor this provides an opportunity for bargain hunting.

The market moves in cycles. Some companies run into company specific problems that cause their stocks to decline. Still others lose favor because of the industry they are in. Whatever the reason, it becomes a top management priority to fix the problem and get the stock moving back up. Their bonus depends on it.

The Dow Dogs of 2015 were AT&T, Verizon, Chevron, McDonald’s, Pfizer, General Electric, Merck, Caterpillar, ExxonMobil and Coca Cola.

Keeping in mind the old maxim that the way to make money in the stock market is to buy low and sell high.  Buying the Dogs provides an opportunity for investors who are looking for a simple way of buying high quality stocks when they go “on sale.”  While there is no guarantee that these stocks will turn around and go back up, the chances are fairly good that some will and that will lead to a positive over-all return.

As an added advantage, investors who buy the Dogs get an above-average income from a steady stream of dividends that these stocks produce. There is even a tax bonus since dividends from these stocks are considered “qualified dividends” for tax purposes and are taxed at a lower rate than ordinary income.

The investor who follows the Dogs strategy strictly will review his portfolio annually and sell those stocks that are no longer the highest yielding. They will be replaced by the new Dogs. By doing this the investor if forced to sell his biggest winners and replace them with the new, lower priced, Dogs.  While selling our winners and buying stocks that are out of favor goes against human nature, it is a time tested strategy that has worked well over long periods of time for the disciplined investor.

The person most responsible for popularizing the Dogs of the Dow Strategy was Michael O’Higgins who wrote a book “Beating the Dow” in 1991. The strategy worked well for a number of years but fell out of favor at the end of the decade when the dot.com boom became the new rage. It’s making a come-back now.

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