Written By: Adrian Moore – Forex Focus
As US stock markets continue to rally, a look at some of the key stocks leading the way.
The Dow Jones Industrial Average (DJIA) rallied to new records to settle at 23157.60 on Wednesday, October 18, up by 160 points or 0.7 percent for the session, the best solo-day performance in more than a month. Wednesday’s rally was supported by 18 of the 30 blue-chip stocks that make up the index and was led by IBM, which rallied close to 9 percent on the back of better than expected third-quarter 2017 results, indicating that the worst is over for the company, although the technology giant reported declining revenues for the 22nd quarter in a row. The record-smashing session in the Dow Jones incidentally comes a day before the 30th anniversary of the crash of October 19, 1987, famously known as Black Monday, when the index plunged about 25 percent, recording the largest percentage drop in a single day. For the year, the index has rallied more than 17 percent after settling at 19762.60 in 2016.
The Dow Jones Industrial Average has been in existence since May 1896 and is the second oldest market index in the US after the Dow Jones Transportation Average; it is among the many indices created by the co-founder of Dow Jones & Company, Charles Dow. The index, which is named after Charles Dow and his business associate and statistician Edward Jones, comprises the performance of the price-weighted average of the 30 largest publicly owned companies in the United States. It is currently owned by S&P Dow Jones Indices, a subsidiary of S&P Global.
The top 10 companies in terms of the largest percentage weights in the index are highlighted in the chart below.
Highlighted below are the five best and worst performing companies in the index for the year to October 18, 2017
Looking at stock-specific performances, Boeing has been leading the way, with the company’s shares surging by close to 67 percent since the beginning of this year. Currently priced near $260, the company has a market cap of 153 billion with a P/E (price-earnings) ratio of around 22.70. In the last five years, the company’s shares have registered a phenomenal growth of nearly 200 percent as defense procurements increased substantially, with the war on ISIS leading to a prolonged stand-off by the US and its allies in the Middle East. In addition, rising geo-political tensions with North Korea, souring relations with Russia and the ever-growing clout of China are all pushing up defense activity in the US, as the country scales up its armoury. Analysts expect defense stocks, including that of Boeing, to continue their upward trajectory in the near-to-medium term. With a weightage of close to 8 percent in the DJIA, any run-up in the price of Boeing’s shares will no doubt have a positive effect on the overall index.
Following Boeing was the mining and construction equipment-maker Caterpillar, returning 41 percent for the year as the company raised its guidance for 2017. In September of this year, UBS raised its rating, driving the company’s shares to rally by more than 8 percent within a month. However, analysts are mixed on the performance of the company going forward, with some citing buying into the shares at current prices a high-risk strategy. Close on the heels of Caterpillar were Visa, Apple Inc., McDonald’s and Coca-Cola with share prices expanding between 35 to 38 percent for the year until October 18, 2017.
Of the 30 large-cap companies representing the index, 13 posted higher returns compared to the broader index, while 24 companies reported positive growth for the year so far. Share prices of Goldman Sachs and Chevron remained unchanged compared to the previous year, while four companies, including IBM, doled out negative returns year-to-date.
Taking into account dividends reinvested, the Dow has rallied more than 25 percent since Donald Trump took over the presidency of the United States on November 8, 2016. The major stocks contributing to the rise include Boeing rallying almost 90 percent, followed by Caterpillar at 58 percent and McDonald’s, Apple Inc., American Express and JPMorgan Chase all rising between 40 to 50 percent respectively. The worst performers include General Electric, down by about 30 percent, followed by ExxonMobil and Verizon at -7.8 and -7.5 percent correspondingly.
The third-quarter earnings season is currently underway, and Dow components including IBM, American Express, McDonald’s, Caterpillar, Verizon and General Electric have already reported their quarterly results that are either in line or better than market expectations, with the only exception being General Electric. The rise in corporate profits will no doubt lead to another round of buying, thereby propping up share prices of these companies, as investors look to make the most of the liquidity-driven bull-market rally that has been running non-stop for more than eight years.
With global interest rates near all-time lows and central banks in Europe and Japan still pursuing stimulus, investors are left with very few options other than to remain invested in the stock markets.