Dow surges toward record in the midst of trade war worries
The Dow Jones Industrial Average closed on its first high since the summer as the stock market rally rolled into the fifth week.
Oil producers, banks, and other well-functioning stocks led the way as the economy strengthens. It’s a remarkable market shift following months of struggles for what Wall Street calls “cyclical” stocks due to heightened worries about the slowing global economy and punishing trade wars effects.
Behind the revival of cyclical are growing hopes of the United States and China making progress in their trade dispute talks, or at least not making it worse. Reports last week also showed that the labour market continues to grow, corporate profits do not do as badly as expected, and interest rates are likely to remain low for a while.
Even in manufacturing, hit particularly hard by the trade war of President Donald Trump, investors saw some expectations that things would soon hit the ground.
That optimism was visible not only in major U.S. stock indexes but also in rising Treasury’s yields. As investors have less protection need, the crowd thins to purchase Treasury bonds. And when Treasurys prices fall, their yields rise.
“Investors are doing what we’re meant to do theoretically: we’re looking at the next 12 to 18 months and saving based on where it’s going, not where we’re now,” said Tom Stringfellow, chief investment officer at Frost Investment Advisors.
“We’re investing in hopes that whatever the worst is, we’re there now.”
KEEPING SCORE: S&P 500 was up 0.4% at 2:24 p.m. Eastern time and aim for a fourth record in six days.
The Dow fell to 27,465 points or 0.4%. It’s on track to hit its all-time 27,359.16 high set in July.
The Nasdaq was up 0.6% and on course for a high.
YIELDS: Treasury yield rose to 1.78 per cent from 1.72 per cent late Friday. Not only that, the gap narrowed between 10-yearand2-year Treasurys yields, which many on Wall Street see as a sign of increased economic trust.
The two-year yield increased from 1.55 per cent to 1.58 per cent, and the gap between it and the 10-year yield was close to its highest since late July.
BANKING ON PROFITS: The widening yield gap lets banks make money by borrowing money at short-term rates and lending it at long-term rates while pocketing the difference.
Financial stocks in the S&P 500 climbed 1 per cent for one of the 11 sectors that make up the index. Bank of America rose 2.1%, and Citigroup gained 1.7%.
Certain cyclical industries, such as electricity and manufacturing, were also ahead of the pack.
Chevron soared 4.5 per cent, and Exxon Mobil gained 3.2 per cent as energy stocks rose 3.2 per cent after oil prices climbed.
A better global economy will mean more energy demand, and US crude benchmark jumped $2.02 to $56.20 per barrel. International standard Brent crude rose 44 cents to $62.13 a barrel.
A 5% jump for General Electric and a 2.5% rise for 3 M, meanwhile, helped drive industrial stocks in the S&P500 up to 1%.
It’s a reprieve for cyclicals that have become a smaller part of the stock market as investors concentrate on defensive companies or firms that can expand no matter what the economy is doing, like Amazon.com, Apple and other big technology firms.
Cyclical companies make up about 34% of S&P 500, down from 41% in early 2018, according to James Paulsen, Leuthold Group’s chief investment strategist.
DOWN DEFENSE: defensive stocks lagged. For the S&P 500’s most significant loss, utilities dropped 1.3%, and real-estate stocks fell 0.9%.
HOW MUCH LONGER: The calendar may be the explanation for the change to cyclical stocks. It’s what typically happens late this year, said Sam Stovall, CFRA’s chief investment strategist.
“People’s attitude changed from a protective’ Sell in May ‘ approach to a more cyclical approach, as usually happens,” he said.
But the change doesn’t automatically mean the economy and industry all-clear. Barry Bannister, head of Stifel’s institutional equity strategy, sees cyclical stocks perform better than defensive stocks by mid-2020, but he sees the S&P 500 fall back to 3,050 by the end of the year and increasing to only 3,100 by 2020.
WEEK AHEAD: This week, after last week’s steady flow of company results and economic reports, Wall Street has less emphasis. The U.S. government will release international trade information on Tuesday, and investors will keep a close watch on Tuesday’s new service sector survey, as planned. CVS reported its latest earnings on Wednesday and Walt Disney reported its latest results on Thursday.
PIERCED ARMOR: Under Armour, the accounting practices have been under federal investigation for two years. The company confirmed cooperating with the U.S. U.S. Securities and Exchange Commission Justice Department.
OUSTED CEO: McDonalds dropped 3.2 per cent after the fast-food chain kicked out CEO Steve Easterbrook because he had a consensual relationship with an employee that violated company policy. He’s CEO since 2015.
OVERSEAS: European and Asian markets rose. Japan’s holiday market was closed.