Thursday, August 3, 2017

Dow Passes 22000, Fueled By Broad Global Growth

Market passes milestone even as U.S. economy disappoints.


By Akane Otani and Ben Eisen
The Wall Street Journal
August 3, 2017

The Dow Jones Industrial Average topped 22000 on Wednesday, reaching another milestone in the long bull market as investors bet that a resurgent global economy can offset lukewarm U.S. growth.

The blue-chip index claimed its 32nd record of the year. Stocks continue to chug higher without a pullback of greater than 3% in more than a year, and volatility levels by some measures are hovering near all-time lows. The rally has been powered in large part by a revival in U.S. corporate earnings, which are on pace for another quarter of strong growth.


The Dow Industrials rose 52.32 points, or 0.2%, to 22016.24, led by gains in shares of Apple Inc.AAPL 4.73%  after the company reported strong iPad and Mac sales in its most recent quarter late Tuesday.

Overall, big companies with a sizable presence overseas, such as McDonald’s Corp.MCD 1.66% and Boeing Co. BA -0.62% , have helped fuel the rally, and many investors are counting on a weak dollar to boost U.S. exports. Apple’s gain—its biggest in six months—added roughly 49 points to the Dow Wednesday.

Stocks must navigate a number of new challenges if the 8-year-old rally is to continue. The U.S. economic expansion is showing signs of stalling. President Donald Trump’s proposed mix of tax cuts, infrastructure spending and deregulation was intended to revive the economy, but some of his agenda has been stalled. Optimism about a pro-growth fiscal policy has waned.

“Economically things have been picking up nicely around the world, while the U.S. has turned out to be relatively disappointing,” said Jimmy Chang, a senior portfolio manager and chief investment strategist at Rockefeller & Co.

With domestic data looking lackluster, shares of multinational companies—which stand to benefit more than U.S.-focused companies from global growth—should fare well, he said.

Paul Quinsee, global head of equities at J.P. Morgan Asset Management, said the strong earnings season reflects “more evidence of an upswing in the fortunes of the world economy.”

“Investors were expecting good earnings, and overall have not been disappointed,” he said.

A combination of low inflation and rising global growth could keep U.S. stocks climbing, despite a sluggish expansion in the U.S. and investors’ dimming hopes for policy changes from the Trump administration to kick-start the economy.

Investors and analysts in particular point to China as a sign that the global economy is on the mend, with a recovery in investment, manufacturing and trade. Europe also is perking up, with second-quarter data this week showing that the eurozone economy had gathered pace, a recovery that could encourage the European Central Bank to decide in the fall to scale back its bond-buying program.

The International Monetary Fund most recently projected global gross domestic product growth at 3.5% for 2017, up from 3.4% last July. The IMF raised growth estimates for China, citing strong credit growth and fiscal support, and the euro area, highlighting diminishing political risks there.

Meanwhile, the IMF lowered its forecast for U.S. economic growth in 2017 to 2.1% in July, compared with its projection of 2.5% a year ago. It cited skepticism the Trump administration would be able to push through business-friendly policies such as tax cuts.



Even with global growth improving, inflation has remained persistently sluggish. That has contributed to weakness in the U.S. dollar, a boon for U.S. corporate earnings because it makes U.S. exports cheaper to foreign buyers. It also takes some pressure off the Federal Reserve to raise interest rates.

The WSJ Dollar Index, which measures the U.S. currency against a basket of 16 others, has fallen 7.5% since the start of the year, leading some firms to raise their year-end forecasts for U.S. stocks.

At the end of July, investment bank Jefferies raised its estimate for where the S&P 500 would end the year to 2500 from 2325, citing weakness in the dollar, “robust growth in overseas markets as global trade re-synchronizes and the lack of policy tightening by China.” The S&P 500 rose 1.22 points, or less than 0.1%, to 2477.57 Wednesday.

There are signs that U.S. companies whose businesses rely more on sales to customers overseas are already starting to benefit from these conditions.

The S&P 500 industry groupings that get a higher share of their sales internationally than the benchmark are collectively up 13% in 2017 through Tuesday, topping the S&P 500’s 11% rise over that period, according to Goldman Sachs Group Inc. The groups with a higher share of domestic revenues than the S&P 500 were up 10% over that time.

Among companies in the blue-chip Dow, shares of airline manufacturer Boeing Co., which recently got nearly three-fifths of its sales from outside the U.S., according to S&P Dow Jones Indices, are up 53% this year. That makes it the best-performing stock in the Dow industrials in 2017.Part of the reason behind Boeing’s rally is a rise in global airline passenger traffic, which is boosting demand for new planes. Business has become “more geographically diverse and balanced across the globe,” said Dennis Muilenburg, the company’s chief executive officer, on an earnings call last Wednesday.

Other companies that serve as economic bellwethers have benefited from the global rebound. Caterpillar Inc., whose shares have risen 22% this year, reported last Tuesday that it may see its first year-over-year revenue increase since 2012, thanks to growing demand in China’s construction sector and a stabilization in commodity prices.

“Mining and oil-related activities have come off recent lows and we’re seeing improving demand for construction in most regions,” said James Umpleby, Caterpillar’s chief executive officer, on the firm’s earnings call.

And the S&P 500’s technology sector has been the year’s best performing group in the benchmark, rising 23% as investors seek out companies with growing sales and profit in a sluggish U.S. economy. Tech got 57% of its sales from outside the U.S. at the end of last year, more than any of the 11 S&P 500 sectors except energy, according to S&P Dow Jones Indices.

The steady rise of passive investing, where investors own indexes that track broad markets, could be helping to spread gains beyond specific stocks and sectors, some analysts say. U.S.-based mutual funds and exchange-traded funds that track indexes owned 13.9% of the S&P 500 at the end of March, up from 4.6% in 2005, according to a Wall Street Journal analysis of data from Morningstar Inc. and S&P Global Market Intelligence.

Still, many investors remain wary of the long U.S. stock rally. Auto sales, a heavyweight in the economic recovery, fell for a seventh consecutive month in July, and consumer debt loads have risen.

A renewed slide in oil prices—especially if it is accompanied by fears of slowing global demand—could put pressure on global profits, similar to what happened at the start of 2016, analysts say.

Any signs that central banks are moving toward raising rates faster could also hit stocks, which have benefited from years of easy-money policies and historically low interest rates.

In addition, U.S. companies broadly are getting a smaller share of their revenues from abroad, potentially giving them less exposure to improving global growth. Foreign sales made up 43% of the total S&P 500 revenues at the end of 2016, the least since 2003, according to S&P Dow Jones Indices.

But for now, many investors say a resurgent global economy means U.S. stocks still have room to run.

Jack Ablin, chief investment officer at BMO Private Bank in Chicago, says that recently he has been focusing more on large-cap U.S. stocks with multinational revenue sources, rather than domestically focused small- and midcap names. This year he picked up shares of Boeing, which have gone up so much recently that they risk making up too much of his portfolios and may need to be trimmed to conform with firm rules.

“We’re just trying to follow the growth directly with our asset allocation,” he said.


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