Capital 19 Catch-Up

The Dow Leads The Way In May as the Headline Index Celebrates Its 125th Birthday

The major indices continued to inch higher this week, as low volatility and low volumes took centre stage ahead of the Memorial Day long weekend. The whole market has been in sort of a holding pattern in recent weeks as Wall Street awaits news of the next Fed move and important inflation data. However, the quietness didn’t incorporate all sectors as cryptocurrencies continued to trade wildly, and the so-called meme stops took off again to remind the hedge funds not to relax too much just yet.

All of the major indices made ground this week and with the big tech stocks back in favour, it was the Nasdaq who led the way, gaining 2.1%. The S&P500 followed in second place making 1.2% over the five sessions. While the Dow was just slightly behind the benchmark index, clocking a 0.9% gain for the week.

The strong performance of the Nasdaq wasn’t enough to save it from notching its first loss in seven months, however, as it dropped 1.5% in May. It was better news for the Dow and the S&P500 who picked up their fourth successive winning months. The headlining Dow was the best in May with a 1.9% gain, while the benchmark’s strong last week saw it claw into the green for May with a 0.6% gain.

Wednesday also marked the Dow’s 125th birthday. The Dow began life in 1896 with just twelve railroad stocks making up the total of the index. This expanded to 20 stocks in 1916, and then to the thirty stocks we know today in 1938 when index founders Charles Dow and Edward Jones realised they needed a broader representation of stocks. Today the Dow composes a wide cross-section of industries and includes such well-known companies as Apple, American Express, Coke, Exxon, Goldman Sachs, Home Depot, JP Morgan, McDonald’s, Pfizer, Tesla and Walmart.

It has returned just under 8% annually since its inception, with its best year coming smack bang in the middle of the first world war when it jumped an impressive 81.7% in 1915. Its worst year came amidst the Great Depression when it fell in half, losing 52.7% in 1931. In the last 30 years, the Dow has just managed to outpace the S&P500 making 11.17% in annualized total returns (including dividends) compared to the 10.59% of the benchmark index.

Reopening stocks led the way this week as the number of covid cases in the US dropped to their lowest levels since June 2020. The seven day average of new infections fell into the low 20,000’s as it was announced more than half of US citizens have had at least one vaccination jab. the Cruise lines had a particularly good week as hopes of getting back out on the water lifted. Norwegian Cruise Lines (NCLH) jumped 4.7% on Monday as they announced they will return to running cruises in the summer, while Royal Caribean (RCL) gained 3.9% on Wednesday as they received approval to begin test cruises with volunteer passengers.

It was also a good week for Catch Up favourite Ford as they announced they would increase their investment in the electric vehicle category to $30 billion through to 2025. The carmaker expects 40% of sales globally to be EV’s by the end of the decade. The stock was up 8% after the announcement and 11.7% for the week.

We recommended Ford back in May of last year in one of our stock reports when the share price was beaten down to around $5. We then reiterated the buy in an update in December when the share price had risen to $9. It is currently sitting at a very comfortable $14.53 at Friday’s close. That’s around a 190% profit in just a touch over twelve months, and it’s all because of their commitment to electric vehicles. Their moves, which are being followed by car manufacturers globally, are an indicator that all see the future as fossil fuel free, and it’s why Tesla will never reach the lofty valuations its share price has already reached. Once the big boys shift into gear, Telsa will be left as a niche carmaker at best. And while they still have a big future in batteries it won’t sustain the current share price.

The meme stocks took off again this week as retail investors looked to push up the price of random stocks regardless of all sensible valuations. Gamestop (GME) was the focus again and managed to gain 43.7% for the week. It’s now sitting at $222 a share, which is half of where it reached in late January, but around $200 higher than where it should be. AMC Entertainment (AMC) has been another focus for the Redditors, and it more than doubled in price this week, up a momentous 119%. I wouldn’t want to be short any of these stocks, it would send you up the wall. On the flip side, I really wish these Reddit traders would choose one of my holdings to boost artificially higher.

On the earnings front, we had retailer Urban Outfitters (URBN) jump 10% after announcing an earnings beat. They were coming off a $1.41 loss per share in the same period a year ago, so a profit of $0.54c and revenue that increased by 57.6% was a big boost for investors. Fellow fashion retailers Nordstrom (JWN) weren’t as lucky as net sales were down 13% and the company failed to offer improved guidance despite economic reopenings. Nordstrom dropped 5.8% after the announcement.

Outside of the retailers, Snowflake (SNOW) fell 4.2% after widening losses, while Nividia lost 1.3% despite beating estimates on the top and bottom lines. The chipmaker increased revenue by 84% year on year, coming in at $5.66 billion when analysts were expecting $5.4 billion. It also beat easily on profits and came at a time when the rest of the industry was suffering a semiconductor shortage. Sales of its processors specifically made for cryptocurrency miners reached $155 million. We continue to like Nvidia despite its lofty valuation. CRM service Salesforce (CRM) also beat earnings and rose 5%.

Speaking of cryptocurrencies, they continued their wild little ride over the weekend as investors feared the Memorial Day weekend could be devastating for prices. Bitcoin is down around 37% so far in May which will be its worst monthly performance since September 2011. Prices were down another 5% on Saturday but then rallied up 5% on Sunday. Heaven knows what will happen tonight. At the bottom of today’s Catch Up we have a little write up on the new Micro Bitcoin Futures and why you’re much better off trading these rather than the real thing. Please check it out if you are so inclined.

In data news, an important inflation indicator rose in April but not by enough to spook the market. The core personal consumption index rose 3.1% in the last month when analysts were expecting a 2.9% rise. Consumer spending was up 0.5% and in line with expectations. The weekly jobless claims were also impressive. They dropped to 406,000 for the previous week in what was a pandemic record low. Economists had expected 425,000 new claims.

In the week ahead all eyes will be on the nonfarm payrolls due out on Friday. Last months numbers were a shocker so a second poor surprise to the downside could send a tremor down Wall Street. Leading up to Friday other big reports will include construction spending and the PMI for May which both come out on Tuesday. On the earnings front, we’ll have report cards from Hewlett Packard (HPE), Advanced Auto Parts (AAP), DocuSign (DOCU), Lululemon (LULU), and Slack (WORK).

Remember, it’s a public holiday in the US tonight so markets will be closed. They’ll be back up and running for Tuesday which will be the first trading session of June. Keep an eye out for the new Top 30 list in your inboxes tomorrow morning if you’re a Top 30 trader.

Have a great week.