Extra, Extra, Read All About It!

Charles Dow and Edward Jones started publishing the Dow Jones Industrial Average in their newly formed newspaper on May 26, 1896.  It began by adding the closing prices of twelve large companies that Dow believed to represent the stock market and then dividing that number by twelve.  At the time, The Wall Street Journal was published in the afternoon and cost $5 for an annual subscription.
It’s likely that Messrs. Dow and Jones would not have imagined that their stock market index would thrive for over 120 years.  Nor is it probable that they would predict it reaching 20,000.  Yet, at the end of 2016, the Dow is approaching that threshold.
Of course, we’ve gotten here with the help of a 7% rally in the Dow Jones Industrial Average since election day.  And while industrial and energy companies have gotten credit, the real heavy lifting has been done by the financials.  And among the financials, Goldman Sachs has shone the most muscle.
Goldman Sachs closed last week at $241 – up 32% since from November 8th.  Goldman is the highest priced stock in the index and because the Dow is a price weighted index (as opposed to a market capitalization weighting such as the S&P 500) it has the biggest impact.  Of the 1,282 points that the Dow has risen since the election, Goldman Sachs is remarkably responsible for 408 of them.  The next biggest contributors are United Health Care (112 points) and JP Morgan (103).
Of course, inquiring minds want to know – why the move?  Certainly, Goldman Sachs is a premier organization and a leader in finance and investments.  On top of this, the market is expecting lower expenses for the company due to the materially reduced regulations from ‘Trumpnomics’.
Also, we can’t ignore the impact of algorithms and computer trading.  These systems are often trend following so that once something starts to move higher buyers follow.  The “Goldman Sachs” name has been very visible recently as some in top management are moving 200 miles southwest to be part of the new cabinet and administration.  Algorithms and trading software constantly search the news for active keywords and phrases so this could have contributed bids for Goldman Sachs.
Regardless the reason, Goldman Sachs has recently played a big role in helping the Dow approach 20,000.  Naturally this threshold has the financial media’s attention.  And as of last week’s close, the Dow is only 244 points or 1.2% away.  Last week was the 5th consecutive higher week for the Dow and Friday marked the 14th record close since the election.  During that time the Dow has rallied 10.45% which is the best 5 week move since 2011.  Here are the year-to-date numbers for the major averages.
2016 YTD
Dow Jones Industrial Average                           +13.4%
S&P 500                                                             +10.5%
Nasdaq Composite                                             +8.7%
Russell 2000                                                       +22.2%
Indices are unmanaged, do not incur fees or expenses, and
cannot be invested into directly. These returns do not include dividend.
The bond market has been moving in the opposite direction of the stock market.  The 10-year treasury yield finished last week at 2.46% while the 30-year closed at 3.15%.  These two yields were 1.88% and 2.62% on November 8th.  The TLT is an exchange traded fund that tracks the long bond futures contract and it has plunged 9.6% since the election.  This is a big move for any security in a 5-week period, but it is an especially violent drop for a supposedly stable asset class like bonds.  To put it another way, this drop is 3 years’ worth of interest payments.
Unless the world comes to end, the Fed will raise interest rates on Wednesday.  While this has been discounted by the markets, the statement and press release will reveal more on the expected actions in 2017.  The Fed similarly raised the rate last December which resulted in a strong dollar which caused disruptions in the foreign exchange markets.  The Chinese renminbi weaken dramatically and that caused global markets to drop.  The stock markets fell in January as stocks had the worst start to a year in history.
This year has a different landscape.  While the dollar has been strong, the foreign exchange markets are not as fragile as last year.  Also, commodities have rebounded from last year’s levels which provide some support to the emerging markets.  Even Europe will be trying to normalize monetary policy.
Another stabilizing factor is some good economic reports.  Recent data has indicated that the economy is gaining some strength.  And while these reports have been released after the election, they measure activity prior to November.  As an example, the latest ISM (Institute of Supply Management) report was released last week and it showed an increase from 54.8 to 57.2.  Readings above 50 correlate with an expanding economy.
To be sure, some of this good news has been discounted in the markets.  And while we don’t expect a correction, further upside could be a challenge.  Still with year-end quickly approaching combined with many professionals under-performing their benchmarks, prices might get bid even higher.  That would be a nice Christmas present.
Jeffrey J. Kerr, CFA
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Past performance is not indicative of future results. Investing involves risks, including the risk of principal loss. The strategies discussed do not ensure success or guarantee against loss. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index. Trading of derivative products such as options, futures or exchange traded funds involves significant risks and it is important to fully understand the risks and consequences involved before investing in these products. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. If assistance is needed, the reader is advised to engage the services of a competent professional
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