Everybody wants some. Stocks surged yesterday in response to positive developments in the fight against COVID. Also present in yesterday’s trading was optimism on US-China relations.
N O T E W O R T H Y
Two-way street. I certainly didn’t plan on writing a mini-series about the makeup of stock indexes, but indexes are the way that most people gauge the performance of the markets. In fact, many people use the performance of indices to gauge the health of the economy. A side-note on that. Despite lots of positive developments in some recent economic numbers, the economy is still not in a healthy place. You can chalk that up to unemployment, which remains stubbornly high and the virus, which continues to hinder a full reopening of many businesses. No matter what model you use to measure the economy, until those two factors turn around, we cannot expect economic performance to return to normal. In fact, economists surveyed by the National Association of Business Economics are not so sanguine on the economy with nearly 80% of the respondents believing that there is a one out of four chance of a double dip recession. Of the economists that were surveyed, nearly half expect economic growth to return to its December 2019 levels by the second quarter of 2022 or later. 2022, as in not next year. That just underscores the growing divide between expectations from economists versus the hopes of stock market investors. Back to the markets, the S&P hit another new all-time high yesterday, but this time the rally didn’t rest on the shoulders of one or two stocks. The rally was broader as 413 of the S&P500 member stocks rose in yesterday’s session. Yesterday, I wrote about Apple’s influence on the major indexes including the price-weighted Dow Jones Industrial Average. I didn’t get too deeply into the how the Dow Jones stocks are actually selected, but it is worth mentioning this morning. The S&P500 is made up of the top 500-ish largest cap stocks which trade on US exchanges. Of course, there are some rules for being included on the list, but for the most part, inclusion is fairly objective with the markets themselves having the biggest influence. The Dow Jones Industrial Average, on the other hand, is made up of 30 stocks which are supposed to represent the industrial performance of the US Economy. The index was first calculated back in 1893 by Charles Dow, who was the Editor of the Wall Street Journal. Today, the index's components are determined by a committee and the requirements for membership are not completely clear, though all members are large cap stocks. If we refer to the index's high-level objective of representing the American economy, it becomes clear that with only 30 slots to fill, the task of selection is not an easy one, requiring changes along the way. The last major change to the index came in 2018 when General Electric was replaced by Walgreens Boots Alliance. Considering that GE was on the index as an inaugural member back in 1893, I suppose you might say that things have changed, and that is a big deal. Apple, which seems to be a hot topic so often lately joined the club in 2015 when it replaced AT&T (member since 1916). In yesterday’s note, I wrote about Apple’s strong influence on the Dow and how that will change when its 4 four 1 announced split divides its share price by 4 next week. The move by Apple also prompted that "membership committee” to rethink the makeup of the index once again. Yep, it happened. Last night WHILE YOU SLEPT, Exxon Mobile, Pfizer, and Raytheon were replaced by Salesforce.com, Honeywell, and Amgen. The move will ensure that tech continues to have a strong influence on the index, despite Apple’s stock split. The Dow is off by -0.81% year to date while the tech-heavy Nasdaq is up by +26.83%… just for reference.
THE MARKETS
Stocks rose yesterday after the FDA announced a COVID treatment fast track over the weekend, while Fox Business Network revealed that Pfizer expects to have sufficient data to complete its phase 3 trials by the end of October. The S&P500 climbed by +1.00%, the Dow Jones Industrial Average rose by +1.35%, the Russell 2000 Index traded up by +1.03%, and the Nasdaq Composite Index added +0.60%. Bonds were unchanged and 10-year treasuries added +3 basis points to 0.65%.
NXT UP
- FHFA House Price Index (June) may have climbed by +0.30% after falling as much in the prior month.
- Consumer Confidence (Aug) is expected to have increased to 93.0 from 92.6.
- New Home Sales (July) are expected to have risen by +1.8% after rising by +13.8% a month earlier.
- San Francisco Fed President Mary Daly will speak today.
- This morning BestBuy beat estimates while Salesforce.com, Intuit, Nordstrom, and Toll Brothers will announce after the close.