How Other Markets Affect the Dow
For many casual investors, knowing that the Dow Jones Industrials are down 18 points as of 2:45 p.m. EDT this afternoon is enough to satisfy their curiosity. As earnings season continues, surprises in companies' results have pushed the markets up and down from one day to the next. Today, weakness in the construction and infrastructure sector and concerns about whether the housing market can keep up the rapid growth it has enjoyed over the past year are pressuring some of the Dow's key component stocks.
But in order to get a complete picture of what's happening in the markets, it's important to pay attention to other types of investments as well. For instance, bond prices are moving somewhat lower today, pushing yields up as auctions of seven-year Treasury notes offer the highest yields in two years. Those rising yields tend to signal increases in mortgage interest rates as well, and if rising mortgage rates spur declines in refinancing and new-home purchase financing activity, it could spell trouble for big banks both within and outside the Dow that have come to rely on housing-related income for a substantial part of their earnings.
Meanwhile, crude oil is very slightly higher, with domestic West Texas Intermediate climbing less than a dime to about $105.50 and Brent crude prices rising about $0.50 to $107.70. Rising prices have been important in helping push Dow energy giants ExxonMobil and Chevron toward all-time highs, but because both of these companies have integrated operations that include production, transportation, refining, and marketing, the influence of the spread between WTI and Brent prices is less extreme, as it simply changes the relative profitability of segments within each business. For energy companies that focus on particular areas, be they upstream exploration and production activity or downstream refining operations, those narrowing spreads have favored upstream over downstream players lately, as refiners have gotten less of a price advantage than in the past from what had been higher discounts for domestic crude inputs.
Finally, the U.S. dollar finished weaker against the euro and the British pound but strengthened against the Japanese yen. During this earnings season, we've seen many companies struggle due to the impact of the strong dollar on the value of their foreign revenue and earnings. For instance, Caterpillar cited what it called a "substantial currency headwind" in its second quarter that weighed on its disappointing results. The company doesn't expect a recurrence of the $134 million in currency-translation and hedging losses it suffered during the quarter, but investors should keep an eye on currency movements and weigh their potential impact on earnings.
Watching the Dow is smart, but following other markets as well is smarter. That way, you'll get a broader view of what's going on in the financial world and be able to spot trends more quickly than less attentive investors.
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