We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Dow Turns Green YTD in Old Format: What Will the Revamp Unfold?
Read MoreHide Full Article
On Aug 28, the Dow joined its peers the S&P 500 and the Nasdaq Composite in positive territory year to date for the first time since Feb 21. Incidentally, this was the last trading day of the blue-chip index in its old format. In a major shake-up, the 30-stock index will get a new look as three incumbent stocks will be replaced by three new comers effective Aug 31, before the opening bell.
Will the new Dow gather pace like the other two major indexes? Will the latest restructuring make the 124-year old stock index more market-friendly and reflect investors' sentiments more accurately. Let's discuss briefly.
Dow Lagging Its Peers
So far this year, the Dow is lagging its peers. Although the index has climbed 57.3% from its recent low recorded on Mar 23, the S&P 500 and the Nasdaq Composite have jumped 60% and 76.4%, respectively, during the period. More importantly, year to date, the Dow is up just 0.4% while the S&P 500 and the Nasdaq Composite have surged 8.6% and 30.4%, respectively.
The S&P 500 recorded a fresh all-time high on Aug 18 erasing all coronavirus-led losses and surpassing its previous high posted on Feb 19. The Nasdaq Composite also erased all pandemic-induced losses and is currently well above the landmark 11,000 level. However, the Dow is yet to gain 3.2% to outpace its all-time of 29,568.57, recorded on Feb 12.
Dow's Restructuring — What Does It Mean?
As per the restructuring, Pfizer Inc. (PFE - Free Report) , Raytheon Technologies Corp. (RTX - Free Report) and Exxon Mobil Corp. (XOM - Free Report) will be replaced by salesforce.com inc. (CRM - Free Report) , Honeywell International Inc. (HON - Free Report) and Amgen Inc. (AMGN - Free Report) . This is the latest shake-up of the Dow since Jun 26, 2018, when Walgreens Boots Alliance Inc. (WBA) had replaced General Electric Co.(GE).
According to the S&P Dow Jones Indices, the restructuring was necessary after Apple Inc.'s (AAPL - Free Report) decision of a 4-to-1 stock split. Since the Dow is a price-weighted index, the stock split will reduce the blue-chip index's exposure to the high-growth technology sector.
The revamp is likely to make the Dow more growth oriented. In the past six months, shares of salesforce.com have rallied 53.3% while Exxon Mobile has plunged 24.5%. Amgen has surged 19.2% compared with just 8.6% gain of Pfizer. Honeywell is up 2.5% but Raytheon has plummeted 53.6%.
However, one caveat is that the position of Apple (up 67% in the past six months) in the Dow hierarchy will decline from the first to 17th spot after the stock split. The major components will be UnitedHealth Group Inc. (UNH),The Home Depot Inc. (HD) and Amgen.
Notably, United-Health and The Home Depot have advanced 15.1% and 24.5%, respectively, in the past six months. Apple and salesforce sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
In addition, three macroeconomic drivers will help the Dow gather momentum.
Fundamentals of U.S. Economy Remain Stable
A series of economic data from April to August like the job market, the housing market, vehicle sales, retail sales, manufacturing and services along with better-than-expected second-quarter GDP and corporate earnings revealed that the pandemic-led economic devastations were not as severe as expected earlier.
The U.S. economy will gradually return to the pre-pandemic level as more parts of it reopen. These positives will set gains in motion for stocks from cyclical sectors such as industrials, financials, materials and consumer discretionary aside from the technology sector.
The primary reason for the Dow lagging its peers is the weight of technology stocks within the indexes. The Dow doesn't have much concentration on the technology sector. The majority of its components are from the cyclical sectors. Therefore, more reopening of the economy is likely to result in greater momentum for the Dow.
Fed's Annual Jackson Hole Symposium
On Aug 27, in his annual Jackson Hole symposium speech Fed Chairman Jerome Powell announced an important policy change of the central bank regarding inflation control. The newly adopted "average inflation targeting" policy will allow inflation and employment to run higher together for some time in order to support the pandemic-ravaged economy.
The Fed's target of 2% inflation rate will remain unchanged. The policy adopted by the central bank so far was to hike the benchmark interest rate whenever the inflation reached 2% or every near that level and the unemployment rate fell to a historically low level.
However, under the new policy, the inflation rate will remain higher than 2% along with higher employment for some time. This inherently means that the benchmark interest rate, which is currently low in the 0 - 0.25% range, will remain at that level for a longer than-expected period.
Moreover, Powell has changed the Fed's approach toward employment. Under the new approach, the jobs situation will be described by the Fed’s “assessments of the shortfalls of employment from its maximum level” rather than “deviations from the maximum level'' followed earlier.
Expectations for a New Fiscal Stimulus
On Aug 28, Reuters reported that President Donald Trump is willing to sign a $1.3 trillion coronavirus relief bill. White House Chief of Staff Mark Meadows said it will be an increase of $300 billion from an initial $1 trillion offer from the White House and Senate Republicans.
However, Democratic House of Representatives Speaker Nancy Pelosi said anything below $2.2 trillion will be inadequate to support American people and their families. Notably, emergency unemployment benefits that were initiated by the Trump administration in March ended on Jul 31.
The chart below shows the price performance of nine above-mentioned Dow stocks in the past six months.
5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
Image: Bigstock
Dow Turns Green YTD in Old Format: What Will the Revamp Unfold?
On Aug 28, the Dow joined its peers the S&P 500 and the Nasdaq Composite in positive territory year to date for the first time since Feb 21. Incidentally, this was the last trading day of the blue-chip index in its old format. In a major shake-up, the 30-stock index will get a new look as three incumbent stocks will be replaced by three new comers effective Aug 31, before the opening bell.
Will the new Dow gather pace like the other two major indexes? Will the latest restructuring make the 124-year old stock index more market-friendly and reflect investors' sentiments more accurately. Let's discuss briefly.
Dow Lagging Its Peers
So far this year, the Dow is lagging its peers. Although the index has climbed 57.3% from its recent low recorded on Mar 23, the S&P 500 and the Nasdaq Composite have jumped 60% and 76.4%, respectively, during the period. More importantly, year to date, the Dow is up just 0.4% while the S&P 500 and the Nasdaq Composite have surged 8.6% and 30.4%, respectively.
The S&P 500 recorded a fresh all-time high on Aug 18 erasing all coronavirus-led losses and surpassing its previous high posted on Feb 19. The Nasdaq Composite also erased all pandemic-induced losses and is currently well above the landmark 11,000 level. However, the Dow is yet to gain 3.2% to outpace its all-time of 29,568.57, recorded on Feb 12.
Dow's Restructuring — What Does It Mean?
As per the restructuring, Pfizer Inc. (PFE - Free Report) , Raytheon Technologies Corp. (RTX - Free Report) and Exxon Mobil Corp. (XOM - Free Report) will be replaced by salesforce.com inc. (CRM - Free Report) , Honeywell International Inc. (HON - Free Report) and Amgen Inc. (AMGN - Free Report) . This is the latest shake-up of the Dow since Jun 26, 2018, when Walgreens Boots Alliance Inc. (WBA) had replaced General Electric Co.(GE).
According to the S&P Dow Jones Indices, the restructuring was necessary after Apple Inc.'s (AAPL - Free Report) decision of a 4-to-1 stock split. Since the Dow is a price-weighted index, the stock split will reduce the blue-chip index's exposure to the high-growth technology sector.
The revamp is likely to make the Dow more growth oriented. In the past six months, shares of salesforce.com have rallied 53.3% while Exxon Mobile has plunged 24.5%. Amgen has surged 19.2% compared with just 8.6% gain of Pfizer. Honeywell is up 2.5% but Raytheon has plummeted 53.6%.
However, one caveat is that the position of Apple (up 67% in the past six months) in the Dow hierarchy will decline from the first to 17th spot after the stock split. The major components will be UnitedHealth Group Inc. (UNH),The Home Depot Inc. (HD) and Amgen.
Notably, United-Health and The Home Depot have advanced 15.1% and 24.5%, respectively, in the past six months. Apple and salesforce sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
In addition, three macroeconomic drivers will help the Dow gather momentum.
Fundamentals of U.S. Economy Remain Stable
A series of economic data from April to August like the job market, the housing market, vehicle sales, retail sales, manufacturing and services along with better-than-expected second-quarter GDP and corporate earnings revealed that the pandemic-led economic devastations were not as severe as expected earlier.
The U.S. economy will gradually return to the pre-pandemic level as more parts of it reopen. These positives will set gains in motion for stocks from cyclical sectors such as industrials, financials, materials and consumer discretionary aside from the technology sector.
The primary reason for the Dow lagging its peers is the weight of technology stocks within the indexes. The Dow doesn't have much concentration on the technology sector. The majority of its components are from the cyclical sectors. Therefore, more reopening of the economy is likely to result in greater momentum for the Dow.
Fed's Annual Jackson Hole Symposium
On Aug 27, in his annual Jackson Hole symposium speech Fed Chairman Jerome Powell announced an important policy change of the central bank regarding inflation control. The newly adopted "average inflation targeting" policy will allow inflation and employment to run higher together for some time in order to support the pandemic-ravaged economy.
The Fed's target of 2% inflation rate will remain unchanged. The policy adopted by the central bank so far was to hike the benchmark interest rate whenever the inflation reached 2% or every near that level and the unemployment rate fell to a historically low level.
However, under the new policy, the inflation rate will remain higher than 2% along with higher employment for some time. This inherently means that the benchmark interest rate, which is currently low in the 0 - 0.25% range, will remain at that level for a longer than-expected period.
Moreover, Powell has changed the Fed's approach toward employment. Under the new approach, the jobs situation will be described by the Fed’s “assessments of the shortfalls of employment from its maximum level” rather than “deviations from the maximum level'' followed earlier.
Expectations for a New Fiscal Stimulus
On Aug 28, Reuters reported that President Donald Trump is willing to sign a $1.3 trillion coronavirus relief bill. White House Chief of Staff Mark Meadows said it will be an increase of $300 billion from an initial $1 trillion offer from the White House and Senate Republicans.
However, Democratic House of Representatives Speaker Nancy Pelosi said anything below $2.2 trillion will be inadequate to support American people and their families. Notably, emergency unemployment benefits that were initiated by the Trump administration in March ended on Jul 31.
The chart below shows the price performance of nine above-mentioned Dow stocks in the past six months.
5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
Today, See These 5 Potential Home Runs >>