31 Aug Capital 19 Catch-Up
The Dow Turns Positive For 2020 and Promptly Dumps Its Oldest Member and Everything You Need To Know About the Apple Stock Split
The Dow Industrial Average joined the S&P500 and the Nasdaq in turning positive for 2020 as the headline index rose 2.6% for the week on the back of strong data and some positive news coming out of the Federal Reserve’s online conference. And it was five weekly gains in a row for the S&P500 and the Nasdaq who both gained more than 3% for the week, as technology stocks continued to rise and banking stocks also moved higher.
The Dow also announced it would be making the largest change to its line up in more than seven years. Apple’s (AAPL) stock split, which comes into effect on the market open tonight, instigated the reshuffling which will see the Dow’s longest-serving component Exxon Mobil (XOM) replaced in the index by cloud computing and CRM provider Salesforce (CRM). Exxon has been a part of the Dow’s thirty stocks since 1928. Other changes will include replacing Pfizer (PFE) with Amgen (AMGN) and Raytheon Technologies (RTX) with Honeywell International (HON). Matthew has written an in-depth look at all of the changes in an article that you can find at the bottom of the Catch-Up today.
It was a great week for Salesforce in more ways than one. As well as being given the honour of appearing in the most widely watched index in the world it also smashed earnings estimates on both profit and revenue and jumped 26% in Wednesday trading. Earnings per share came in at $1.44, better than the $0.67c expected, while revenue hit $5.15 billion, beating out the $4.90 billion estimated by analysts.
Salesforce rose more than 30% for the week in what is proving to be a headache for the Dow committee. The big jump came just two days after being announced as a new Dow component. The problem is that the Dow is a price-weighted index which is carefully curated to ensure that no sectors show undue influence over the index.
A lot of thought goes into selecting its components and its why the Apple stock split in the same week caused the initial shakeup. When one of its components rises too hard too fast it causes problems. Cue Salesforce gaining by more than a third before it had even been included. If it manages to hold its current value the CRM provider will be the fourth most powerful stock in the Dow when it is officially introduced into the index tonight. No doubt the Dow committee will be keeping a close eye on proceedings.
For those that hold Apple, and I know that a lot of you do, you will see a change in your holdings when you login next. As of tonight, for every share you held in Apple, you will now hold four shares. You will also see the share price drop by approximately 75%. The upshot is that the value of your shares will be still relatively the same. Just the number of shares and the share price will have changed. Sometimes it takes a while for systems to adjust to the split so don’t be alarmed if you see a large unrealised loss. It just means the system hasn’t adjusted to the price change just yet.
Elsewhere, Fed chairman Jerome Powell used his speech at the annual economic symposium, usually held at Jackson Hole, to announce a more dovish response to inflation as the US eventually moves back into economic prosperity. Interest rates will stay lower for longer as the Fed decreases its fascination with keeping inflation at the historically agreed-upon level of 2%. They will also allow unemployment to stay lower for longer without the need to raise rates thereby putting a crimp on the economy.
This new way of thinking will hopefully ensure that an economic rally is let to properly settle in before thoughts of containing it are entertained. The moves come at a time when inflation has been lower for a longer period of time than in much of history. It’s great news for Wall Street as we now know the tap won’t be turned off as soon as the economy turns around. No more “bad news is good news” type thinking. Gold bugs also enjoyed the news as the gold price moved 2% higher following the announcement. The banks will be major beneficiaries and the three big guns JP Morgan Chase (JPM), Bank of America (BAC), and Citibank (C) all made more than 5% for the week.
The economic data for the week was a mixed bag. Weekly jobless claims came in right on the 1 million mark, which was also right on expectations. Sales of newly built homes rose by 36.3% in July which was its highest rise since 2006. It was the third month of sizable gains in a row following a dramatic slowing in March and April as the pandemic ground construction to a halt. Durable goods orders were also up, rising 11.2% in July when the market expected a gain of just 4.3%.
Considering all of this, it was surprising when consumer confidence fell heavily for the second month in a row. After reaching highs of 132.6 in February and falling to a bottom of 85.7 in April, it rebounded to 98.3 in June. However, the last two months have seen it fall to 91.7 in July and then 84.8 in August, even lower than the low April number in the midst of the pandemic. It was an interesting contrast between the strong economic data and the expectations of consumers going forward. I imagine much of it stems from the potential economic reopenings of May and June which had to be curtailed as coronavirus cases rose again.
In the week ahead the August non-farm payrolls will be closely watched to see how jobs have been impacted by economic closures. In the lead up to the monthly jobs numbers on Friday, we’ll also have manufacturing for August, construction spending, private employment and the July trade deficit.
Earnings wise we have the darling of the pandemic Zoom Video (ZM) reporting its latest set of numbers. Shareholders will be praying the numbers stay strong considering the share price is up a whopping 344% from the start of the year. We did a stock report on Zoom back on the 6th of March (which you can read here: https://capital19.com/investing-in-us-stocks/zoom-video-conferencing-zm/) and if you had have invested at that time you would still be up a handy 161% on your investment. It is also the second top performer in our pandemic portfolio which has been going since the 25th of March https://capital19.com/investing-in-us-stocks/the-pandemic-portfolio-update-4/). Home exercise technology company Peleton (PTON) leads the way there with a gain of 209% in that time.
Have a great week.