Why the Dow Exploded Upward
Sep 6th 2012 3:05PM
Updated Sep 6th 2012 3:10PM
So much for September being the worst month of the year for the Dow Jones Industrial Average (INDEX: ^DJI) . In a rare display of solidarity, all 30 of the index's component stocks are up in intraday trading, contributing to a monster 220-plus gain for the index. The exuberance can be traced to two factors.
1. Europe steps up to the plate
For one, it's clear that the markets are celebrating the European Central Bank's decision to step up its efforts in the continent's struggle against sovereign debt.
In a much-anticipated move, ECB president Mario Draghi announced this morning that the central bank would initiate a bond-buying program designed to relieve pressure on countries like Spain and Italy, both of which have seen their bond yields rise over the past few years.
According to the announcement, the ECB could potentially buy an unlimited amount of sovereign bonds with maturities of between one and three years. Draghi described the program as "outright monetary transactions," likely to distinguish it from the so-called "quantitative easing" policy adopted by the United States Federal Reserve, which is aimed at bonds with longer-dated maturities and, in the opinion of my colleague Dan Newman, may be ruining our future.
The most immediate impact of the announcement was seen in sovereign-bond yields across the European continent. Yields on 10-year Spanish bonds fell 38 basis points to their lowest level in four months, while Italian 10-year bond yields decreased 25 basis points. This follows a rally that began at the end of July. Since then, yields for these two countries have come down by more than 20%.
Here at home, the biggest impact was felt by financial stocks. The leading gainers on the Dow today are Bank of America (NYS: BAC) and JPMorgan Chase (NYS: JPM) , both of which are currently up more than 4% as fears of a eurozone implosion have evidently been assuaged for the time being. Not to mention that Bank of America also announced that it will sell a medical-uniform business it owns to a group of private-equity investors. According to my colleague Dan Caplinger: "The move continues B of A's long track record of divesting non-core assets to shore up its capital and refocus on its banking division."
2. Positive signs from the labor market
The second factor underlying the market's exuberance relates to the labor market. A report issued today by Automatic Data Processing showed that the domestic private sector added 201,000 jobs last month, well above the 140,000 to 150,000 expected by economists. At the same time, ADP's July estimate was revised to 173,000, up from its initial estimate of 163,000.
While the better-than-expected figure is nothing to sneeze at, the real test comes tomorrow when the Bureau of Labor Statistics releases its nonfarm-payroll data. This number has been more sanguine over the last few years because it includes government workers, whose ranks have been falling in response to budgetary pressures on state and local governments. According to The Wall Street Journal, economists expect total nonfarm payrolls to have increased by only 125,000 in August -- well below the 201,000 jobs added by the private sector alone.
Despite that downbeat estimate, stocks across the board have responded favorably to the news. Beyond the high-flying financials, the biggest group of gainers consists of technology stocks including networking specialist Cisco Systems (NAS: CSCO) , chip maker Intel (NAS: INTC) , and software giant Microsoft, all of which are up more than 2% on the day.
Protect yourself from the vicissitudes of the market
At the end of the day, regardless of Europe and the jobs numbers, if you want to shield your portfolio from the increasingly volatile market. The best way to do so is by investing in strong, well-diversified companies that pay a respectable dividend. A handful companies that fit this description are outlined in our recently released free report about three Dow companies every dividend investor needs. Simply click here to download your free copy of this report before it's too late.
The article Why the Dow Exploded Upward originally appeared on Fool.com.Fool contributor John Maxfield owns shares of Bank of America. The Motley Fool owns shares of Bank of America, Microsoft, Intel, JPMorgan Chase, and Cisco Systems. Motley Fool newsletter services have recommended buying shares of Microsoft and Intel. Motley Fool newsletter services have recommended creating a synthetic covered call position in Microsoft. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.