Among the leading U.S. stock market indexes, the Dow Jones Industrial Average (DJIA) has staged a particularly impressive rally from its Dec. 2018 lows, and is now within 3% of its all-time high. Cyclical stocks in the financial, energy and industrial sectors tied especially closely to the economy have been particular standouts in the rally, and the dovish stance taken by the Federal Reserve has renewed hopes among bullish investors for continued gains.
“Right now and for the foreseeable future, the U.S. is in quite a strong position economically,” Ryan Larson, head of U.S. equity trading at RBC Global Asset Management, told the Wall Street Journal. “Even if growth slows, the expectation seems to be that we avoid a recession,” he added.
The Dow Is On Fire
- Gain in 2019: +12.0%
- Gain From Dec. 2018 Low: +20.3%
- Drop From High to Low in 2018: -19.4%
Source: Yahoo Finance, as of the open on Feb. 25, 2019
Significance For Investors
Banking and financial stocks have been helped by stabilizing yields on long-term U.S. Treasury securities since they tend to borrow at lower short-term rates and lend at higher long-term ones, the Journal observes. Among the financial stocks in the Dow, Goldman Sachs Group Inc. (GS) and American Express Co. (AXP) have been the leaders, up by 30.5% and 21.5%, respectively, from their December lows to the Feb. 25 open.
The prices of oil and other key industrial commodities have been on the rise in 2019, driven by expectations of continued economic growth. The price of U.S. crude oil was up by 26% year-to-date through Feb. 22, thereby staging its best-ever performance during the first 36 trading days of a new year, per Barron's. Dow components Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) have posted respective gains of 21.3% and 19.1% from their lows.
Improving business sentiment is propelling industrial stocks, which so far in 2019 are the best-performing sector in the broader S&P 500 Index (SPX), up by 18.0% YTD per S&P Dow Jones Indices. The last time that industrials led the S&P 500 for an entire quarter was in 2013, the Journal notes.
Aircraft manufacturing giant Boeing Co. (BA) has posted a torrid 46.2% gain from its low, leading all Dow stocks. Strong fourth quarter 2018 results, combined with hopes of an added boost from a U.S.-China trade deal, have propelled its shares. Industrial conglomerate United Technologies Corp. (UTX), whose wide-ranging product lines include Otis elevators and Pratt & Whitney jet engines, among many others, is up by 28.1%.
Goldman Sachs observes that "US economic growth has sharply decelerated since early December," per their most recent US Weekly Kickstart report. Goldman projects that inflation-adjusted real GDP growth in the U.S. will average 2.2% in 2019, while they indicate that a recent Blue Chip survey of professional economic forecasters has a median estimate of 2.5% growth. Nonetheless, Goldman says that their basket of cyclical stocks has outperformed their basket of defensive stocks by 410 basis points from Dec. 24 , 2018 through Feb. 21, 2019.
While projections of corporate earnings for 2019 have been trending downwards, one bright spot in 4Q 2018 results has been that, with about 90% of the S&P 500 companies having reported results so far, 61% beat revenue estimates, per another Wall Street Journal story. This is better than the five-year average of 60%, and sales increases are expected in 2019, the report adds. However, based on consensus estimates, Goldman sees average S&P 500 sales growth falling from over 10% in 2018 to about 5% in 2019, excluding financial, real estate, and utility stocks.
The current rally has restored about $9 trillion to global equity valuations, but is beginning to look "tired," as Bloomberg puts it. "Prices have come too far, too fast. Markets could be due for consolidation or a pullback," Bob Doll, chief equity strategist and senior portfolio manager at Nuveen, told Bloomberg. If he's right, and if economic and earnings data begin to disappoint investors, upward momentum in stock prices may be difficult to sustain.