Dow Jones Industrial Average rises on slight optimism from Powell but gains prove unsustainable
- Dow Jones rises after the Fed executes a 0.25% hike at its meeting on Wednesday – as expected.
- The index rose intitially, clocking 0.35% gains but then fell flat soon after.
- Dow component earnings results have been mixed so far this week with plenty still to report.
The Dow Jones Industrial Average (DJIA) rose strongly in reaction to the highly-anticipated Federal Reserve (Fed) meeting on Wednesday but then fell flat once the event was over. The index jerked higher by 0.35% during Fed Chairman Powell’s press conference but gave back gains and was trading flat for the day at the time of writing.
At the meeting the Fed decided to execute a 0.25% hike, as widely expected, bringing the Fed Funds target rate to 5.25-5.50%, its highest level for 22-years.
The accompanying statement shed little additional light on the decision – already priced in by the market – since it did not deviate in its wording from the statement in June.
In his press conference afterwards Fed Chairman Powell made some positive comments about inflation coming down and the resilience of the job market which suggested the Fed might adopt a less hawkish approach in the future and may be the reason for the rise in in the DJIA.
Powell noted, for example, that, “It is a good thing headline inflation has come down so much,” and added, “Unemployment rate at same level as lift off is real blessing.”
Yet at the same time he stressed more needed to be done to bring inflation back down to the Fed’s 2% target, saying “Core inflation is still pretty elevated,” and “We’re going to need to hold policy at restrictive levels for some time.”
The US Dollar sold-off initially as stock markets rallied. The tone of Powell’s press conference and lack of any new hawkish messaging in the statement were both interpreted by investors as indicating the possibility the Fed may adopt a less aggressive approach going forward. It suggested interest rates might come down sooner than thought – a positive for companies straining under higher interest repayments on their debts, as well as higher financing costs to fund new projects.
Dow’r earnings mixed with Coca-Cola
Dow components Visa and Verizon offered up mixed results on Tuesday. Both companies beat adjusted earnings forecasts but missed on GAAP results. Verizon also underperformed the consensus expectation for revenue.
Yet Coca-Cola (KO) bested Wall Street consensus with its second-quarter results early Wednesday, but shares of the soft drink maker slid regardless.
Major Dow components have already released second-quarter earnings this week. Microsoft (MSFT) easily surpassed Wall Street consensus on Tuesday, but a decline in cloud revenue growth hurt the share price. MSFT stock sold off 3.6% in Wednesday’s premarket.
McDonald’s (MCD) and Intel (INTC) announce results on Thursday. On Friday, Chevron (CVX) and Procter & Gamble (PG) finish off the wee
- McDonald’s is expected to earn $2.79 in GAAP EPS on $6.29 billion in revenue.
- Intel is expected to lose $0.51 in GAAP EPS on $12.14 billion in sales.
- Procter & Gamble is expected to earn $1.33 in GAAP EPS on $19.99 billion in sales.
- Chevron is expected to earn $3.16 per share on $49.98 billion in sales.
Dow Jones FAQs
The Dow Jones Industrial Average, one of the oldest stock market indices in the world, is compiled of the 30 most traded stocks in the US. The index is price-weighted rather than weighted by capitalization. It is calculated by summing the prices of the constituent stocks and dividing them by a factor, currently 0.152. The index was founded by Charles Dow, who also founded the Wall Street Journal. In later years it has been criticized for not being broadly representative enough because it only tracks 30 conglomerates, unlike broader indices such as the S&P 500.
Many different factors drive the Dow Jones Industrial Average (DJIA). The aggregate performance of the component companies revealed in quarterly company earnings reports is the main one. US and global macroeconomic data also contributes as it impacts on investor sentiment. The level of interest rates, set by the Federal Reserve (Fed), also influences the DJIA as it affects the cost of credit, on which many corporations are heavily reliant. Therefore, inflation can be a major driver as well as other metrics which impact the Fed decisions.
Dow Theory is a method for identifying the primary trend of the stock market developed by Charles Dow. A key step is to compare the direction of the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) and only follow trends where both are moving in the same direction. Volume is a confirmatory criteria. The theory uses elements of peak and trough analysis. Dow’s theory posits three trend phases: accumulation, when smart money starts buying or selling; public participation, when the wider public joins in; and distribution, when the smart money exits.
There are a number of ways to trade the DJIA. One is to use ETFs which allow investors to trade the DJIA as a single security, rather than having to buy shares in all 30 constituent companies. A leading example is the SPDR Dow Jones Industrial Average ETF (DIA). DJIA futures contracts enable traders to speculate on the future value of the index and Options provide the right, but not the obligation, to buy or sell the index at a predetermined price in the future. Mutual funds enable investors to buy a share of a diversified portfolio of DJIA stocks thus providing exposure to the overall index.