Written By: Adrian Moore – Forex Focus
An insight into the Dow Jones Industrial Average (DJIA), components, top performers and the future outlook.
The Dow Jones Industrial Average (DJIA), one of the world’s oldest and most popular indices, was created by the founder of The Wall Street Journal and co-founder of Dow Jones & Company, Charles Dow. The index launched in 1896 comprises the 30 largest publicly owned companies in the United States, with the industrial portion currently having little or nothing to do with the performance of the broader index, which includes corporations representing all sectors of the economy. The average is price weighted, and the index value is comprised of the sum of prices of the index components separated by a divisor, which changes in the event of stock splits, spin-offs and dividend pay-outs. The price-weighted average also gives higher-priced stocks more influence in the overall performance of the index compared to the lower-priced ones, without taking into account the industry size or the market cap of the companies representing the index.
Since its inception, Dow components have changed 51 times, with General Electric (GE) being the longest-listed enterprise in the index and the most recent addition being Dow DuPont, formed by the merger of Dow Chemical Company and DuPont.
The Dow settled at a record 23,377 at the end of October of this year, with the index returning more than 18 percent year-to-date compared to the 13.5-percent returns in 2016. While 14 of the Dow components outperformed the broader index, nine companies generated positive returns, although they underperformed the index, while seven of them remained in the red.
A look at the top five performers and the outlook going into 2018:
Boeing comes in at number one, with the US aircraft-maker rallying more than 65 percent year-to-date (YTD) on the back of solid earnings numbers led by rising orders for commercial and military aircraft globally. The stock has been assisted by rising geo-political tensions between the United States and North Korea, the election of Donald Trump to the US presidency and a spike in US defense spending. In September, Boeing raised its demand forecast for commercial airplanes in China by 6.2 percent over the next 20 years, valued at more than $1 trillion. Midway through this year, analysts had rated a HOLD on the stock, mostly for its dividend pay-outs with the target price ranging between $170-200. However, the stock has not only outperformed market expectations, but looks set to extend its bull run well into 2018.
Caterpillar Inc. is placed second, with the stock of the global leader in mining and construction equipment rising more than 46 percent for the year. Stock prices have expanded more than 140 percent from the lows of $56 in January 2016. In addition, this year alone, the stock has been in the green for the last seven months on the trot, rising from $93 in March to settle close to $136 at the end of October, registering gains of more than 45 percent. According to IHS Markit, the company is ranked positively in three out of four categories, driving the company to rate the stock “positive” from “neutral”. Although the analytics company expects economic output for the sector to expand at a slower pace going forward, the stock reported massive net inflows from exchange-traded funds (ETFs) in October, with bearish sentiment at record lows. According to analysts’ outlooks for the next 12 months, the stock price could range between $100 and $175, with median estimates placed at around $145.
Apple Inc., with a market cap of close to $900 billion, returned close to 46 percent YTD on the back of a string of successful product updates and launches in 2017. In addition, the company’s stock prices have been buoyed by strong earnings and look set to overshoot a trillion in market capitalization, second only to PetroChina, which briefly climbed over the $1 trillion mark in 2007, led by the global rally in crude-oil prices.
With Apple Inc. settling at $169 in October, the company is currently trading at a P/E (price-earnings) ratio of around 19, the highest since late 2014. Technical analysts think that at current prices, the stock is in overbought territory and could slip as investors look to book profits following a prolonged rally.
Visa Inc., the fourth best performer among the DJIA components, returned around 41 percent this year, with the company’s stock settling in the green in the last nine out of ten months. The stock has produced an annualized return of 25 percent for more than nine years on the trot, leading analysts to label Visa a growth stock in spite of competition from its long-time rival Mastercard and some of the more recent competitors in the global payments marketplace. The company reported strong fourth-quarter numbers in October of this year, with revenues jumping 14 percent for the quarter and 22 percent year-over-year (YoY). Profits rose 11 percent on the back of a 10-percent growth in payment volumes. Based on the company’s recent performance and upgrades, analysts expect earnings to rise 13 percent with estimates of an 8-percent jump in revenues in fiscal first quarter 2018.
The fifth most valuable company in 2017 was McDonald’s, with the stock price of the world’s largest hamburger and fast-food restaurant chain climbing close to 37 percent in the first 10 months of the year, as the company aggressively sold about 4,000 stores across countries in an effort to cut operating costs and rely more on royalty income from franchisees. The company’s third-quarter 2017 earnings were in line with market expectations in terms of earnings per share and revenues. However, sales at stores operational for at least 12 months rose to 4.1 percent from 3.6 percent in the US, while global sales recorded an increase of 6 percent. According to analysts, the 12-month forward guidance for McDonald’s ranges between $150-185, with median estimates at $175.
With the current earnings season almost coming to a close, and the Dow holding near key technical supports at 23,350-23,450, analysts remain mixed on the near-term performance of the equity markets as we approach the end of the current calendar year. Although the broader trend remains bullish with channel resistances at 24,500, a close below 23,350 could lead to profit booking, and the index could correct to 22,800-23,000 before another round of buying in the New Year.