The Dow Jones Industrial Average, or Dow Jones, is a weighted index representing the stock price action of 30 of the largest U.S. corporations. It is the world’s most widely followed stock market index. The Dow Jones Industrial Average was created on May 26, 1896 and is named after Charles Dow and Edward Jones. The earnings and revenues of large corporations are often leading economic indicators. Hence, economists often look at the Dow Jones Industrial Average as an indicator of economic activity. If the index is hitting new highs, economic activity can be expected to be brisk in the next six months. Comparatively, if the index is falling to new lows, poor economic times could lie ahead.
I’ve been writing in these pages for most of 2014 on how the stock market has become one huge bubble. On my short list:
The economy is weak. The U.S. experienced negative growth in the first quarter of 2014. If the same thing happens in the second quarter (we’ll soon know), we will be in a recession again. Revenue growth at big companies is almost non-existent.
Insiders at public companies are selling stocks (in the companies they work for) at a record pace.
The amount of money investors have borrowed to buy stocks is at a record high (a negative for the stock market).
The VIX “Fear” index, which measures the amount of fear investors have about stocks declining, is near a record low (another negative for the stock market).
Bullishness among stock advisors, as measured by Investors Intelligence, is near a record high (again, a negative for the stock market).
The Federal Reserve has issued its economic outlook, and it says interest rates will be much higher at the end of 2015 than they are today and that they will continue moving upward in 2016.
The Federal Reserve has said it will be out of the money printing business by the end of this year. (Who will buy all those T-bills the U.S. government has to issue to keep in business?)
And yesterday, in an unprecedented statement, Janet Yellen, during her usual semi-annual testimony to Congress, said the valuations of tech stocks are “high relative to historical norms.”
How many warnings can you give investors?
Well, the warnings don’t seem to matter. The Dow Jones Industrial Average has … Read More
Stocks are going to gyrate around second-quarter earnings, but that’s exactly what this market needs—the corporate bottom line and expectations for the rest of the year.
With so many stocks trading at their all-time record-highs, I view investment risk in equities as being high at this time.
This is actually a tough environment in which to be an investor looking for new positions. There’s not a lot of value around and good businesses have already been bid.
It’s been years now since the stock market was first in need of a material price correction, and the next one will probably come out of nowhere.
It could be a shock from the Federal Reserve, but the central bank has been extremely delicate in how it effects and communicates monetary policy. More likely, stocks will be vulnerable to an unforeseen shock like a geopolitical event or a big derivative trade gone bad.
The risks are out there and stocks are long overdue for a reckoning.
With this in mind, I’m still a fan of the market’s existing winners, especially dividend-paying blue chips. In the absence of a shock, I think they’ll just keep pushing new highs going right into 2015.
3M Company (MMM) is an enterprise worth following and owning as a long-term, income-seeking investor.
The company’s earnings are material and offer good market intelligence, even if you aren’t interested in owning the stock.
The position has tripled in value on the stock market since the beginning of 2009, while also paying some great dividends.
The stock is still strong in the current environment, and the company represents exactly the kind of … Read More
If there ever was an equity security epitomizing the notion that the stock market is a leading indicator, Caterpillar Inc. (CAT) would fit the bill.
This manufacturer is in slow-growth mode, but it’s been going up on the stock market as institutional investors bet on a global resurgence for the demand of construction and other heavy equipment and engines.
And the betting’s been pretty fierce. Caterpillar was priced at $90.00 a share at the beginning of the year. Now, it’s $110.00, which is a substantial move for such a mature large-cap. (See “Rising Earnings Estimates the New Catalyst for Stocks?”)
The stock actually offers a pretty decent dividend. It’s currently around 2.6%.
While sales and earnings in its upcoming quarter (due out July 24, 2014) are expected to be very flat, Street analysts are putting their focus on 2015. Sales and earnings estimates for next year are accelerating, and it’s fuel for institutional investors with money to invest.
The notion that the stock market leads actual economic performance is very real. Just like there are cycles in the economy, the stock market itself is highly cyclical. And while every secular bull market occurs for different reasons, there are commonalities in the price action.
Caterpillar’s share price is going up on the expectation that its sales and earnings (on a global basis) will accelerate next year.
Transportation stocks, as evidenced by the Dow Jones Transportation Average, are the classic bull market leaders.
Transportation, whether it’s trucking, railroads, airlines, or package delivery services, is as good a call on general economic activity as any. The Dow Jones Transportation Average was … Read More
With the Dow Jones hitting 17,000 being pretty likely in the not-too-distant future, from there, it’s only another 18% or so until the Dow hits 20,000, which is pretty incredible.
These numbers seemed so unrealistic just a few years ago but now, it’s not too farfetched. The most amazing thing to me is that stocks still haven’t experienced a material price correction since the financial crisis.
Stocks aren’t necessarily stretched in terms of valuation, especially with corporate earnings outlooks holding up for this year and going into 2015. What is stretched is investor determination with a market at its high.
Johnson & Johnson (JNJ) is a great company and a worthy long-term investment (see “Three Blue Chips Set to Drive Higher”), but it’s tough to buy stocks at all-time record-highs. In Johnson & Johnson’s case, the position’s up almost 20 points since the beginning of February, and this is on top of a previous 20-point gain in 2013.
One of these days, stocks are going to get walloped. But there’s got to be some sort of catalyst for it to happen.
The Federal Reserve can be a catalyst if it decides to suddenly change its outlook for interest rate certainty. The catalyst could also be a geopolitical event or something that comes out of nowhere, like a big derivatives trade gone bad.
In any event, there will have to be a shock that is perceived to have a lasting effect on capital markets.
In the lull between earnings seasons, which we’re currently experiencing, stocks reaccelerated on the back of very modest economic news and that in itself is … Read More
The great monetary expansion is still alive and well and the effect on equity securities continues to be profound.
But what I find striking about the stock market’s continued advancement is that it’s blue chips that are pushing through to new record highs.
Speculative fervor in several sectors has diminished, but hasn’t completely disappeared. But it’s the big brand-name companies—a lot of which pay dividends—that just keep on trucking as institutional investors buy earnings safety and outlook reliability, and are betting on revenue and earnings acceleration going into 2015.
Union Pacific Corporation (UNP), a benchmark railroad stock, just hit another new record high on the stock market, breaking through the $100.00-per-share level. It was $35.00 a share this time in 2010.
And this from an old-economy, industrial enterprise that is probably not on many investors’ wish lists.
Amazon.com, Inc. (AMZN) broke down considerably at the beginning of the year when it was trading around $400.00 a share. It recently broke $300.00 a share, but has bounced back significantly and the position looks to be fighting hard.
And this is one of the speculative stocks on which investors booked their profits. This stock is on the comeback trail and so are Cisco Systems, Inc. (CSCO), The Priceline Group Inc. (PCLN), Oracle Corporation (ORCL), Apple Inc. (AAPL), and Google Inc. (GOOG).
The stock market has been digesting continued mediocrity in domestic economic data and slightly more positive numbers from China. Institutional investors are buying. I think that, in the absence of some kind of shock or new catalyst, the stock market can slowly keep grinding higher. It could very well turn … Read More
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