Dow Ends Monster Week on a High Note
It's no exaggeration to say that investors have had an eventful week. Since Monday, the Dow Jones Industrial Average (INDEX: ^DJI) is up a whopping 302 points, accounting for nearly a quarter of the index's total year-to-date gain. And thus far today, it appears that things will end on a similarly upbeat note, with the Dow up nearly 30 points in intraday trading.
Recapping the week's most notable events
It seems safe to say that traders are still rejoicing the Federal Reverse's decision, announced yesterday, to initiate a third round of quantitative easing. Under the new plan, the Fed has committed itself to buying $40 billion of federally guaranteed mortgage-backed securities per month. This is on top of both the ongoing Operation Twist -- under which the central bank is increasing the average maturity of its holdings by exchanging short-term for long-term Treasury securities -- and the two previous quantitative-easing programs, which have grown the Fed's balance sheet to nearly $3 trillion.
The purpose of the program is to decrease consumers' monthly mortgage payments and thereby spur consumption -- and, hopefully, employment -- elsewhere. At a news conference following the announcement, Fed Chairman Ben Bernanke noted:
We want to see more jobs. We want to see lower unemployment. We want to see a stronger economy that can cause the improvement to be sustained.
It's also worth noting that two additional pieces of good news were revealed earlier this week. On Wednesday, the German constitutional court upheld the European Stability Mechanism -- essentially the European equivalent of the Troubled Asset Relief Program enacted by the U.S. Congress in the wake of the Lehman Brothers bankruptcy. And on Thursday, the Dutch people reaffirmed their support for the incumbent VVD party. By doing so, they rejected a handful of fringe parties that had campaigned to withdraw support from participation in the continent's ongoing bailout of struggling members like Spain and Italy.
For the week, in turn, all but seven of the Dow's 30 components are in the green. Leading the way up today are Alcoa (NYS: AA) , Caterpillar (NYS: CAT) , and Home Depot (NYS: HD) , all of which are currently higher by more than 2%. All three of these companies stand to profit handsomely from the Fed's decision. As a producer of aluminum, Alcoa's top and bottom lines are both tied closely to the price of the metal, which is expected to rise in the face of monetary easing. And for obvious reasons, both Caterpillar and Home Depot stand to benefit from any increase in housing activity spurred by QE3.
On the opposite end of the spectrum, leading the way down are telecoms AT&T (NYS: T) and Verizon, both of which are off more than 2% for the day. Shares of both companies climbed earlier in the week due in part to excitement surrounding the iPhone 5 launch, announced to mixed reviews on Wednesday. As a result, it's likely that traders are simply taking gains today.
Finally, one last piece of news that's bound to cause some repositioning was the revelation this morning that Kraft Foods had been replaced on the Dow by UnitedHealth Group, the health care giant based out of Minnetonka, Minn. The news comes in anticipation of Kraft's impending split at the beginning of October, after which it will operate as two separate companies, one for its North American grocery business and the other for its international snack business. The former will retain the Kraft name, while the latter will go by Mondelez International, a combination of Latin words meaning "world" and "delicious." According to the committee that runs the Dow, "Mondelez's reduced market capitalization and projected lower percentage of revenue generated from the U.S. makes the company less representative of the U.S. large-cap market space."
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