After posting their best week of the year last week, stocks closed marginally lower on Monday. The slight drop was thanks in part to continued weakness in commodities, and it left the Dow Jones Industrial Average slightly in the red year-to-date.
Despite the fact that the Dow has enjoyed lots of movement but no gains to show for it so far this year, I’m optimistic about the index’s prospects heading into the last month of 2015 … and you should be, too. I have little double that the index will top 18,000 by year-end.
It’s nearly impossible to talk about stock prospects without talking about the Federal Reserve and the supposedly looming rate hike, of course.
Investors are anticipating a rate hike this December after several false alarms. And granted, at face value, higher rates wouldn’t necessarily be good for Dow components on a company-by-company level. Most are multi-national corporations that would much prefer a break from the strength of the U.S. dollar, which is currently sitting a seven-year highs.
But because of all the anticipation around the hike, its effects are already priced into stocks. Also, Yellen just confirmed her caution around higher rates, suggesting that rates will be raised dramatically and further supporting the theory that the impact is already priced in.
Dow Jones Shows Strength in Final Weeks
The rate hike assumption was evident last week when investors overlooked the possibility and pushed U.S. stocks up strongly — even pushing the Dow into the black briefly.
For the Dow specifically, the gains were largely driven by retail and healthcare strength as Nike (NKE) announced a whopping $12 billion buyback plan that had shareholders applauding while United Healthcare (UNH) enjoyed a bounceback.
But beyond those specific glimmers of hope, it’s also important to remember that the impetus for a rate hike in the first place is a strengthening economy … which itself is bullish for stocks. Despite concern around commodities (copper and metal prices are sitting at multi-year lows), there have been promising signs at home and across the pond. And, despite the tendency towards fear-mongering media coverage, that strength is going to show up in stock prices.
A few recent bits of optimism include the fact that jobless claims met expectations and oil is beginning to recover. Meanwhile, Chinese stocks recently gained as the government implemented new measures to drive economic growth. And the supposed earnings recession isn’t as bad as some headlines would have you believe.
As U.S. News recently reported, the third-quarter earnings slump disappears when you back out energy stocks. In fact, excluding that sector, earnings and revenues are up 2.8% and 2.4% respectively.
Add it all up, and there’s plenty of reason to believe the Dow — a resilient bundle of blue chips that will definitely enjoy the economy’s continued recovery — will end the year in the black.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
