Media seems to obsess about the Dow crossing every 1,000-point threshold as if it were as significant as the previous one. However, each successive 1,000 points is less notable than all the preceding ones. When the Dow Jones Industrial Average went from 1,000 to 2,000 it was indeed impressive, as that 1,000-point move represented a doubling of value – a full 100% gain. It also took the index from November of 1972 to January of 1987 to cover that ground, over 14 years.
The next 1,000 points was only a gain of 50%, and the one after that was only 33.3%. Each of those moves took about four years. After the Dow passed through 4,000 in 1995, it traversed through another 1,000-point level once or twice a year, only taking breaks to recover from the 2000 tech bust and 2008 financial crisis.
Yesterday’s achievement of crossing 18,000 was just a 5.9% move from the prior milestone and took less than 6 months to complete. The next 1,000-point move will be even less impressive being just 5.6% higher. Not quite the same level of accomplishment as crossing over earlier 1,000-point thresholds. In fact, the Dow climbed more than 5.6% in the past week alone. Do we really need to celebrate weekly achievements?
As the Dow pushed upward, economic data continued to provide mixed signals. The Commerce Department released its revised estimate for third quarter GDP, revealing an increase in the growth rate to 5.0%. The economy has not seen a GDP number that bullish in more than a decade. On the other hand, orders for durable goods have fallen the past 3 of 4 months, and existing home sales dropped 6.1% with reduced demand in all regions of the country. You can still find lots of headline news you like whether you are bullish or bearish.
Markets close early today and all day tomorrow for Christmas. Then, there are only four more trading days until the curtain comes down on 2014. We wish you and yours a joyous holiday season and a successful 2015.
Real Estate is at the top for a second week. Last month, S&P announced it would upgrade Real Estate from being a subset of the Financials sector to a full-fledged GICS (Global Industry Classification Standard) sector in mid-2016. Maybe we are just ahead of our time since our Sector Edge charts have always included a Real Estate category. Utilities and Consumer Staples bounced strongly enough to each move up a spot and grab second and third place, respectively. We typically expect these two “defensive” sectors to lag during a swift market rebound, but not this time. Technology significantly boosted its momentum, performed well enough to be the “most-improved” sector, and climbed three spots to claim fourth. Financials edged up a notch to fifth. Health Care increased its momentum yet fell from second to sixth. Unlike the improvement in the other defensive sectors, Health Care declined the past two days on weakness in biotechnology stocks. Consumer Discretionary slipped two spots, although you should not view it too negatively since it significantly increased momentum and is nearly tied with the three categories ranked just above it. Materials and Telecom went from deeply in the red to slightly in the green this week. Energy rallied strongly, although it was previously in such a steep plunge that its momentum remains extremely negative.
A week ago, nine of the style categories were in the red and the other two were barely registering positive momentum. This week, all eleven categories are firmly in the green and posting double-digit momentum scores. Small Cap Growth and Micro Cap are in the top two spots again, and they have created a small margin over the others. All three of the Blend categories improved their ranking with Small Cap Blend rising two spots to third. Large Cap Value is the only other style category with a two-spot ranking improvement and now sits in seventh. Large Cap Growth earned the “honor” of having the largest drop in its ranking, falling five spots to eighth. Small Cap Value and Mega Cap swapped places, leaving Mega Cap on the bottom.
Last week, China was barely on the plus side of zero, and the other ten categories were in the red. Today, China and the U.S. are boasting double-digit positive momentum readings. World Equity also managed to shed its negative score from last week. Nine of the eleven global categories are in the same ranking position as a week ago, including the first seven positions. Canada and Pacific ex-Japan were the two categories swapping places, and the Energy rebound helped Canada to gain the upper hand. Strong gains in the U.S. dollar made it tough for international stocks to post advances after currency conversions, but they managed to do so anyway. Latin America remains mired in last place.
“Corporate America is doing fantastic, earnings are at an all time high, interest rates are low, inflation is low, and now you have the added positive of low gasoline prices. All of that adds up to a pretty good environment for equities.”
John Fox, Director of Research at Fenimore Asset Management, 12/23/14
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