5 Things Everyone Should Know About Dow 20,000

Dow 20,000 – an incredible milestone! The Dow Jones industrial average is nearing the 20,000 mark for the first time, and when the barrier is broken, Americans watching the evening news, tuning in to the radio or aimlessly browsing the internet will see the headline, whether they care about it or not.

Should investors really care? Should anyone? And the answer is: yes and no.

Regardless of what importance level you assign to Dow 20,000, here are five things everyone should know about Dow 20k.

1. The Economy is Improving and so are Expectations

This one may be obvious, but with the Dow and other stock market indices at all-time highs, things are getting better. Over the last 81 months the private sector has added an impressive 15.6 million jobs, and in November the unemployment rate hit 4.6 percent for the first time since August 2007.

On top of that, when the Federal Reserve raised interest rates interest rates on Dec. 14, Chair Janet Yellen said the hike was “a reflection of the confidence we have in the progress the economy has made and our judgment that progress will continue … the economy has proven to be remarkably resilient.”

Consumer confidence also improved in November, reaching pre-recession levels once again. As expectations improve, you can generally expect to see the stock market rise as well.

2. The Dow Actually Isn’t a Great Reflection of the Business Landscape

If the first point was a little straightforward, this one may be the most misunderstood: The Dow is definitely not the best measure of how American businesses are performing. That 20,000 figure? That’s only based on the share prices of 30 of the largest companies in the U.S.

“The Dow represents 30 large stocks. The S&P 500 represents nearly 17 times that number,” says Kevin Barr, head of investment management at SEI, an investment management firm headquartered in Oaks, Pennsylvania. “Both the Dow and S&P leave out the mid- and small-cap companies that form much of the stock market, which comprises thousands of stocks. While the Dow is commonly cited as a benchmark, investors need to keep its size and scope in mind.”

On top of that, the Dow is a price-weighted average, which means that stocks with higher share prices carry more influence. Nevermind that this is an entirely arbitrary way to do things. Currently, Goldman Sachs Group (GS) carries the heaviest weight in the blue-chip index at 8.38 percent, while Cisco Systems (CSCO) has the lowest weight at 1.06 percent.

Thus, if CSCO jumps 10 percent after a great earnings report, but GS falls just 1.3 percent, the two cancel each other out as far as the Dow is concerned. This despite the fact that at $153 billion, Cisco is actually worth about $56 billion more than Goldman Sachs.

While the S&P 500 is a better measure of how corporate America is doing, a better measure still is the Russell 3000 and Wilshire 5000, which track thousands of smaller stocks and represent essentially the entire U.S. stock market.

Unlike the Dow, the S&P 500, Russell 3000 and Wilshire 5000 are all market capitalization-weighted.

3. Put Dow 20,000 in Perspective

Due to the power of compound interest, 100-point – or even 1,000-point – swings in the Dow don’t mean what they used to.

Think about it this way: The Dow first crossed the 1,000 mark in November 1972. It would take more than 14 years for the Dow to gain the next 1,000 points, which it accomplished when it first broke 2,000 in 1987. In contrast, the Dow hit 19,000 on Nov. 22, and is approaching 20,000 less than a month later.

So if you hear that the Dow went up or down 100 points in a day, don’t put too much stock into it. In 1972, that was a 10 percent move. Today, it’s a half-percent.

4. A Few Minor Changes in the Index’s Constituents Make a Huge Difference

Further adding to the arbitrary nature of the Dow, the index’s 30 constituents aren’t set in stone like many people might think.

Every few years or so, if it’s necessary, the index committee will add some new member(s) to the index; the incoming stocks will often replace stocks or companies that have been faring poorly or are losing influence.

Sometimes, those decisions can seriously hamper the index’s returns.

The Dow, for instance, added Intel Corp. (INTC) and Microsoft Corp. (MSFT) in late 1999, near the height of the dot-com bubble, only to see both crater over the subsequent year. It would take until 2014 for MSFT and INTC to regain their debut Dow levels.

The most recent Dow addition is Apple (AAPL), which replaced AT&T (T) in March of 2015. Since then, Apple is down 6 percent and AT&T shares are up 24 percent.

David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices, says companies aren’t added to the index because their stock looks attractive. “We’re not picking stocks that we think are definitely going to go up. I know one guy who can’t pick stocks, and that’s me,” Blitzer says.

“With the Dow we’re looking for large, solid, stable companies,” he says. “Most of them if not all of them are household names, people know who they are, and it’s traditionally blue-chip companies.”

5. Just a Psychological Level

Finally: traders just like to see big, round numbers with lots of zeros after them, and investors do too. Crossing a level like Dow 20,000 has no fundamental importance, but technical and short-term traders, as well as trading algorithms, may put some stock in it.

Over time, we’ll be hitting a lot of these psychological marks, says Jon Ulin, a certified financial planner and managing principal of Ulin & Co. Wealth Management, a branch office of LPL Financial in Boca Raton, Florida.

“Since World War II, the Dow Jones index has averaged about 9 percent per year and will continue to do so hitting new highs over time. Just with a meager 7.2 percent annualized return, we should be ringing in a 40,000 Dow by 2027,” Ulin says.

It’s been 44 years since the Dow first hit 1,000 in 1972. If it takes 44 years for the next Dow 20-bagger, we’ll be ringing in Dow 400,000 in 2060 (which will be another election year).

 

 

 

 

Written by John Divine of U.S. News & World Report

Source: U.S. News & World Report

Microsoft Shares Plunge as Results Show Growth is Elusive in Post-PC Market

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Michael Euler/ AP

The cloud may be the future, but the specter of the PC lingers. Microsoft is the latest tech giant whose earnings say that loud and clear.

Microsoft on Thursday posted substantial drops in revenue and earnings as it continues to navigate from its legacy PC business into emerging technologies — a day after chipmaker Intel announced a 11% workforce reduction. (Microsoft owns and publishes MSN.)

The Redmond, Wash.-based company reported a 6% decline in fiscal third-quarter revenue to $20.5 billion. Earnings of $3.8 billion, or 47 cents per share, fell 25%in the same quarter a year ago. Microsoft reported adjusted earnings of 62 cents per share, shy of analyst estimates.

Microsoft (MSFT) shares plunged more than 7% on the news in early trading Friday.

A consensus of analyst reports from S&P Global Market Intelligence anticipated revenue of $22.1 billion and earnings per share of 64 cents. Microsoft’s Q3 revenue guidance was $21.1 billion to $22.3 billion.

The quarterly miss comes as the software giant continues to pursue its years-long gambit to transform itself from a license-fee-focused enterprise closely tied to personal computers to a major play in cloud services, virtual reality, gaming and emerging technologies.

But Microsoft’s future remains unclear after nearly a decade of struggles underscored by declining PC unit shipments. The slowly eroding PC market and tightening IT budgets have punctured revenue for Microsoft and others globally. Sagging PC sales were a major reason why Intel is slashing 12,000 jobs and IBM registered its 16th straight quarter of declining sales.

Microsoft said revenue from Windows software licenses dipped 2% during the March quarter, outperforming the overall PC market.

The computing giant has bet heavily on new technologies, and initial results are promising but uneven. Its cloud business, which includes Azure and server software, rose 3% to $6.1 billion in revenue in the quarter, a shallower growth rate than some expected.

Office 365, its subscription-based suite of productivity services, passed 70 million monthly users. And HoloLens, the company’s space-age holographic computer goggles, has wowed analysts and spurred interest among consumers and corporations such as Volvo and NASA over its possibilities.

Windows 10 is also Microsoft’s fastest-spreading Windows operating system, with more than 270 million installations on computing devices.

Monthly active users of Xbox Live surged 26% from last year, to 46 million.

Since he took over as Microsoft CEO two years ago, Satya Nadella has also cut ties with bum investments in Nokia and struck partnerships with the likes of Salesforce and Apple. The moves have resonated with investors, who have bumped up Microsoft’s stock 30% over the past year.

On Thursday, before the Q3 results were announced, Microsoft shares edged up 0.5% to $55.87.

Written by Jon Swartz of USA Today

(Source: USA Today)

NYSE Trading Halted; Stocks Down 1% as China, Greece Weigh

© Provided by CNBC
© Provided by CNBC

Trading on the New York Stock Exchange in late-morning trade on Wednesday with U.S. stocks extending their losses as continued concerns about Greece and the extended selloff in the Chinese market pressured investor sentiment.

“We’ve had some technical malfunctions. Some may be related to connectivity with other exchanges. I believe we’re going to have a temporary pause certainly in a variety of stocks perhaps floor wide,” Art Cashin, director of floor operations at the NYSE, told CNBC, adding that the halt will not cause a move in a particular direction.

Other exchanges, however, continued trading normally. The NYSE later said that all open orders amid the halt will be cancelled.

“What happens with these situations is often you get a sort of residual result. You’re all clear or you get caught up to date and there’s a little bit of a backlog that pops up somewhere, and it tends to jam things up. So I don’t think any of us has quite enough information yet,” Cashin added.

The Dow Jones industrial average traded about 175 points lower when trading was halted as the major averages declined, with the Nasdaq Composite briefly off more than 1 percent as biotechs and Apple (AAPL) plunged more than 1 percent. The iPhone maker was also the worst performing stock in the Dow.

The S&P 500 struggled to hold gains for the year. The index dipped into negative territory Tuesday but recovered in afternoon trade to hold slightly higher for 2015.

“I think we’re just realigning the U.S. market with the declines elsewhere,” said Peter Boockvar, chief market analyst at The Lindsey Group.

In China, the Shanghai Composite closed nearly 6 percent lower despite supportive government measures. The index has fallen more than 30 percent from its mid-June peak amid frequent bouts of extreme volatility. Analysts say the turbulence is starting to unnerve regional investors.

“There was no real trigger until Chinese stocks became too pricey,” said Nick Raich, CEO of The Earnings Scout. “The trigger that sent this all off has been the Greece debt crisis.”

European stocks traded higher on Thursday amid hopes of a Greece deal. However, the indices are more than 2 percent lower for the week so far.

The Greek government has until Friday morning to present detailed reform proposals to allow a bailout deal by a Sunday summit.

Greek Prime Minister Alexis Tsipras addressed the European Parliament on Wednesday, lambasting Europe’s advocacy of austerity and the efficacy of Greece’s bailout programs since 2010, but promised a detailed, “concrete” deal would be presented in the next two to three days.

“Unfortunately the U.S. will remain headline-driven until earnings season which (starts) with Alcoa tonight,” Boockvar said. “Today will clearly be bullied around by headlines out of Greece.”

The Federal Open Market Committee (FOMC) minutes at 2 p.m. ET will also be in focus, with traders scanning the Federal Reserve’s June meeting report for hints on interest rate rise timing.

“I think the Fed minutes are something to watch closely,” said Randy Frederick, managing director of trading and derivatives at Charles Schwab. But “usually the market doesn’t do much around the minutes until they’re released.”

The Dow Jones Industrial Average (.DJI) traded down 194 points, or 0.99 percent, at 17,583, with Intel leading decliners and Microsoft (MSFT) the only advancer.

The S&P 500 (.SPX) traded down 23 points, or 1.14 percent, at 2,057, with telecommunications leading all 10 sectors lower.

The Nasdaq (.IXIC) traded down 64 points, or 1.31 percent, at 4,931.

The CBOE Volatility Index (VIX) (.VIX), widely considered the best gauge of fear in the market, traded near 18.

About five stocks declined for every advancer on the New York Stock Exchange, with an exchange volume of 194 million and a composite volume of 1.22 billion as of 11:30 a.m.

Crude oil futures for August delivery lost 81 cents to $51.52 a barrel on the New York Mercantile Exchange. Gold futures rose $7.50 to $1,160.20 an ounce in morning trade.

Bond yields held lower, with the 10-year yield at 2.23 percent and the 2-year at 0.57 percent. The Treasury auctions $21 billion in 10-year notes this afternoon.

The U.S. dollar fell about half a percent against major world currencies as the euro gained to above $1.10.

Earnings season unofficially begins with aluminium producer Alcoa (AA) reporting after the market close.

Written by Evelyn Cheng of CNBC

(Source: MSN)