The Dow Jones steered past the 27,000 mark for the first time in its 120-year history, thanks to healthcare shares. The Trump administration’s scrapping of a plan designed to control prescription drug prices boosted health insurers. To top it, Fed chief Jerome Powell’s reaffirmation of a rate cut helped the index move up. Hence, it makes sense to invest in solid blue-chip stocks that can make the most of a Dow rally.
Dow Closes Above 27,000 for the First Time
The Dow gained 227.88 points, or 0.9%, to close at 27,088.08 on Jul 11. The 30-stock index closed above the 27,000 mark for the first time. It took nearly 372 days for the blue-chip index to cross the 27,000 mark from when it reached the 26,000 mark in January 2018. Such stellar gains helped the index register a gain of 16% so far this year. Lest we forget, the Dow has recorded its best first half since 1999 and best June since 1938.
Some of the prominent Dow components that drove the index to a 27,000 milestone include Visa Inc. (V - Free Report) and Microsoft Corp. (MSFT - Free Report) . Since January 2018, shares of Visa have jumped a whopping 50%, rising to $180.74 a share from $121.98. Visa benefitted immensely from its Visa Europe acquisition, increasing business volumes, investment in digital technology and a solid balance sheet.
Shares of Microsoft too climbed more than 54%, trading at $138.40 from $90.14 a share at the close of trading on Jan 17. The company’s new subscription model, Azure, and other promising new products boosted its cash flows.
Most importantly, a recent rally among healthcare shares pushed the Dow above the coveted 27,000 mark. And among the top blue-chip healthcare players, it was United Health (UNH - Free Report) that registered the highest percentage jump on Jul 11, up 5.5%. But why did healthcare shares rally at the first place? Let’s take a look.
Trump Drops Plan to Curb Drug Rebates
Let’s face it, hefty heathcare costs have been one of the primary concerns for U.S. voters heading into the 2020 election. And Trump had promised to come up with an executive order to curb drug pricing. He had assured to introduce a GOP health plan and had issued an executive order that will require both hospitals and doctors to disclose pricing to patients.
But recently, maybe due to some legal challenges and feuds between government agencies, Trump has decided to drop plans to curb drug prices. The White House has declared that the Trump administration won’t be trimming industry rebates that drug makers give to middlemen in Medicare. It comes after a federal judge dismissed a separate rule that requires drug companies to disclose their prices in television ads.
Health insurers rallied on the news. After all, the abandoned proposal would have compelled such health insurers to pass billions of dollars in rebate they receive from drug manufacturers to Medicare patients.
Fed’s Powell Lock in on a Rate Cut
It’s worth mentioning that Powell’s dovish remarks also helped propel the Dow. Powell has dropped enough hints regarding a potential rate cut later this month and this is primarily because of two major issues. As Powell categorically puts it, trade-related matters remain unresolved and concerns about global economic growth continue to weigh on the U.S. economy.
Powell’s statement to the House lawmakers comes at a time when Trump is building pressure on the Fed to cut interest rates to bolster the U.S. economy. Some may say that the Fed is submitting to the pressure tactics of the President but Powell reaffirmed that the Fed is an independent body and won’t be swayed by Trump.
Nonetheless, Powell, the President’s choice to run the most powerful central bank in the world, is facing considerable pressure to help the U.S. economy grow at a steady clip. Needless to say, Trump’s tariff strategy is affecting economic growth. A slew of other factors are also posing a threat to the U.S. economy. Notable among them are muted inflation and a looming debt ceiling crisis that the Congress is yet to resolve.
Majority of policymakers too have agreed that the “economy had appeared to have lost some momentum” in recent weeks and that a rate cut is much needed in the near term as it could “cushion the effects of possible future adverse shocks to the economy.”
4 Blue-Chip Stocks to Buy Now
Thanks to the aforementioned bullish factors, there has been a particularly sharp run up in the 120-year-old index of 30 stocks. These companies are slated to gain in the near term as they have large market capitalization, strong balance sheet and solid cash flow. We have, thus, selected four such blue-chip stocks that have a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Visa operates as a payments technology company. The Zacks Consensus Estimate for its current-year earnings has moved up 0.9% over the past 60 days. The company’s expected earnings growth rate for the current year is 16.5%, compared with the Financial Transaction Services industry’s projected rally of 12.4%. The company has outperformed the broader industry over the past year (+29.7% vs +25.1%).
Cisco Systems, Inc. (CSCO - Free Report) designs, manufactures and sells Internet Protocol-based networking and other products related to the communications and information technology industry. The Zacks Consensus Estimate for its current-year earnings has moved up 0.7% over the past 60 days. The company’s expected earnings growth rate for the current year is 18.5% against the Computer - Networking industry’s estimated decline of 7.9%. The company has outperformed the broader industry over the past one-year period (+37.2% vs +33.2%).
Merck & Co., Inc. (MRK - Free Report) provides healthcare solutions. The Zacks Consensus Estimate for its current-year earnings has risen 0.4% over the past 60 days. The company’s expected earnings growth rate for the current year is 9.2%, compared with the Large Cap Pharmaceuticals industry’s anticipated fall of 2.6%. The company has outperformed the broader industry in a year’s time (+28.8% vs +6.6%).
UnitedHealth operates as a diversified health care company in the United States. The Zacks Consensus Estimate for its current-year earnings has moved up 0.3% over the past 60 days. The company, which is part of the Medical - HMOs industry, is expected to see earnings growth of 10.5% and 14.5% in the current quarter and year, respectively. The company has outperformed the broader industry over the past one-month period (+6.7% vs +6.0%).
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