The Dow notched up successive record gains during a week marked by grievous losses for tech stocks. Concerns about valuations continued to push tech stocks lower on Monday, leading to notable losses for the broader markets. However, the Dow was able to ride the rebound staged on Tuesday and remained unaffected by the Fed’s rate hike announcement on the very next day. Only on Thursday did the index once again succumb to the tech led correction sweeping through the markets.
Last Week’s Performance
The Dow advanced 0.4% after large tech stalwarts such as Facebook (FB - Free Report) , Alphabet (GOOGL - Free Report) , Amazon (AMZN - Free Report) and Apple (AAPL - Free Report) all fell more than 3%. Additionally, Microsoft (MSFT - Free Report) slipped 2.3% after Goldman Sachs (GS - Free Report) declared that these five companies’ recent stellar outperformance was potentially overheated. Semiconductors, who make chips for these tech-behemoths, also fell. Financials gained on Friday, following heightened expectations about rate hikes taking place after the Fed meeting scheduled to occur this week.
The index gained 0.3% over last week even as other benchmarks closed with losses. On last Thursday, James Comey’s testimony concluded without any major revelations and the ECB hinted no more interest rate cuts were forthcoming in the short term. Meanwhile, Prime Minister Theresa May’s Conservative party failed to secure a parliamentary majority, coming up with 318 seats out of 650. Additionally, investors also digested the Labor Department’s seasonally adjusted initial claims report which fell to 245,000 in the week ending June 3.
The Dow This Week
Technology shares continued to decline for the second successive session on Monday, as investors continued to sell off technology shares. The recent downgrade of Apple, Inc. by Mizuho Securities sustained the tech selloff that began on Friday. Shares of Facebook, Google parent Alphabet, Amazon, Apple and Microsoft suffered a second day of declines.
Meanwhile, General Electric Company’s (GE - Free Report) shares moved north following news that the company’s CEO Jeff Immelt will be replaced by John Flannery. Nevertheless, the Dow declined 0.2%.
The index advanced 0.4% on Tuesday to close at a record level after technology shares staged a recovery. Financials moved north after the U.S. Treasury Department revealed a plan to amend the financial regulatory framework. The proposed plan includes easing of restrictions that banks face in their trading operations and curbing powers of the Consumer Financial Protection Bureau.
Meanwhile, investors remained focused on the outcome of the Fed’s two day policy meeting and the testimony of Attorney General Jeff Sessions before the Senate Intelligence Committee.
The Dow posted a record close for the second consecutive session on Wednesday, gaining 0.2%, after the Federal Reserve raised the key interest rate and provided details about how it intends to unwind its balance sheet. Fed policymakers reiterated their projections of one more rate increase in 2017, followed by three hikes each in 2018 and 2019. Additionally, the central bank provided more details on the unwinding of its massive $4.5 trillion balance sheet.
Coming to the details, the Fed aims to reduce fixed amount of assets on a monthly basis. Initially, the amount is expected to be $10 billion, including $6 billion from Treasuries and $4 billion from mortgage-backed securities (MBS). In addition, the capped amount will increase once in three months by $6 billion for Treasuries and $4 billion for MBS to achieve the target of $30 billion and $20 billion, respectively. (Read: Banks Rejoice as Federal Reserve Hikes Rate to 1.00-1.25%)
The index declined 0.1% on Thursday after shares of technology stalwarts continued to decline, sending the broader markets lower. Decline in energy shares due to increase in U.S. crude production and low domestic gasoline demand also added to pressure on markets. Meanwhile, investors also digested news that Robert Mueller has been assigned the task of determining whether President Trump was guilty of obstructing justice.
Components Moving the Index
General Electric recently announced the appointment of John Flannery as CEO, effective Aug 1, 2017. The company’s existing CEO Jeff Immelt will be stepping down after serving the company for over 15 years. He will remain Chairman of the Board till his retirement on Dec 31, 2017. John Flannery will take over the position of General Electric’s Chairman and CEO from Jan 1, 2018. GE has a Zacks Rank #3 (Hold).
Immelt succeeded “legendary” CEO Jack Welch in 2001, shortly before the attacks of 9/11. During that time, the company was already seeing a decline from its all-time peak around the turn of the millennium.
Flannery began his career with the company in 1987. Since then, he has led several businesses including GE Healthcare, GE India, and the company’s business development team through the successful acquisition of Alstom’s energy and grid businesses. (Read: GE Appoints John Flannery as CEO, Expands Predix Platform)
In a separate development, the proposed merger between Baker Hughes Inc. BHI and GE has been cleared by The Australian Competition and Consumer Commission (ACCC). On Jun 12, the U.S. Justice Department approved the merger on the condition that General Electric will divest its GE Water business. The companies also received merger authorization from the European Commission on May 31. (Read: Baker Hughes & GE Electric Merger Gets ACCC Clearance)
United Technologies Corporation (UTX - Free Report) recently announced a 6.1% year-over-year hike in its quarterly dividend to 70 cents per share or $2.80 on an annualized basis. The increased dividend will be paid on Sep 10 to shareholders on record as of Aug 18. The stock has a Zacks Rank #2 (Buy).
Based on the closing price of $120.01 on Jun 14, the proposed dividend affirms a yield of 2.3%. A steady dividend payout is part of the long-term strategy of United Technologies to provide attractive risk-adjusted returns to its stockholders. In addition, healthy dividend hikes at periodic intervals have been one of its high points. (Read: United Technologies Hikes Quarterly Dividend by 6%)
Caterpillar Inc. (CAT - Free Report) announced that its board of directors has approved a 1.3% increase in quarterly dividend to 78 cents per share after a hiatus of two years. The move reflects the company’s balance sheet strength and improved cost structure which has once again enabled it to deliver incremental returns to shareholders.
The increased dividend will be paid on Aug 19, 2017, to shareholders of record as of Jul 20, 2017. The last dividend hike had come in Jun 2015, when it was hiked by 10% from 70 cents to 77 cents. Starting from 1990, Caterpillar had been hiking its dividend every summer, starting with quarterly payout due in July. The stock has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Verizon Communications Inc. (VZ - Free Report) completed its long-awaited deal to acquire the core businesses of the Internet-company, Yahoo! Inc., for $4.48 billion. This is, however, a revised $350 million discounted deal which came after Yahoo’s two major data breaches, after the original $4.83 billion deal announced in July 2016.
Under the terms of the deal, Zacks Rank #3 rated Verizon will take control of Yahoo's core assets including its search products, digital content brands, advertising and analytics assets. The closure of this deal paves the way for a new beginning. Oath will be part of Verizon’s Media and Telematics organization and will be overseeing a diverse house of more than 50 media and technology brands under Yahoo and AOL, engaging more than a billion people globally. (Read: Verizon Communications to Launch Oath Post Yahoo Buyout)
Pfizer Inc. (PFE - Free Report) and Eli Lilly and Company (LLY - Free Report) announced that the FDA has granted fast track designation to their pipeline candidate, tanezumab for the treatment of chronic pain in patients with osteoarthritis (OA) and chronic low back pain (CLBP). (Read: Pfizer & Lilly Get Fast Track Designation for Pain Candidate)
In a separate development, Zacks Rank #3-rated Pfizer announced a deal to buy exclusive EU commercialization rights to anti-fungal treatment, Cresemba from Swiss pharma company, Basilea Pharmaceutica Ltd. Cresemba, an intravenous (IV) and oral azole antifungal for the treatment of two serious infections, invasive aspergillosis and invasive mucormycosis, is presently marketed both in the U.S. and EU. (Read: Pfizer Buys Exclusive EU Rights to Anti-Fungal Drug)
Performance of the Top 10 Dow Companies
The table given below shows the price movements of the 10 largest components of the Dow, which is a price weighted index, over the last five days and during the last six months. Over the last five trading days, the Dow has gained 0.6%.
Last 5 Day’s Performance
Next Week’s Outlook
The blue chip index posted two back to back record closes this week, riding on a rebound for tech shares. Tech stocks received a drubbing at the hands of investors worried about valuations for the second consecutive day on Monday. Though the Dow managed to ride the tech rebound on Tuesday and remained unaffected by the Fed rate hike on the following day, this is a trend which is unlikely to catch on.
Instead, we may soon be witnessing more of something along Thursday’s events. The market is now facing a near term correction and it remains to be seen whether the Dow emerges relatively unscathed.
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