6 Stocks Leading the Dow Back to Green in 2016

The Dow turned positive in the year-to-date frame to erase losses incurred since the start of 2016 after five consecutive sessions of gains. After hitting a two-year low on Feb 11, the blue-chip index gained 9.4%, mostly led by a strong rally in oil prices and a gradual reduction in recession fears following encouraging economic data. Seventeen out of the 30 Dow components ended in the green for the year.

The index also got a significant boost after the Fed decided to keep the key interest rate unchanged and forecast a fewer number of rate hikes this year at its two-day policy meeting which ended on Wednesday. Given this backdrop, it will be interesting to find which blue-chip components have helped the Dow most to recover from heavy losses. But before discussing the top gainers from the index, let’s have a look at the key factors that boosted the index in recent times.

Factors that Led to Gains

Oil Rally

The strong rally in oil prices emerged as the main reason behind the recent surge in the blue-chip index. The WTI crude gained nearly 53.4% after plunging to a 13-year low on Feb 11 on rising possibility of a production freeze, continuing decline in the rig count and a lower-than-expected rise in crude inventories. Qatari oil minister and the president of OPEC, Mohammed Bin Saleh Al-Sada, recently said that the major oil producers will be meeting in Doha on Apr 17 to discuss issues regarding the production freeze.

Meanwhile, Baker Hughes Inc. (BHI - Analyst Report) reported a nine-unit decline in the rig count in the U.S. to an all-time low of 480 during the week ending Mar 11. It also marked the twelfth consecutive week of decline. Additionally, the U.S. Energy Information Administration reported an increase of 1.3 million barrels in crude inventories to 523.2 million for the week ending Mar 11, lower than a rise of 1.5 million barrel reported by the American Petroleum Institute (API).

These positive developments helped the broader S&P 500 sector – Energy Select Sector SPDR (XLE) – to jump 5.7% in the year-to-date frame. Meanwhile, two Dow components – Exxon Mobil (XOM - Analyst Report) and Chevron (CVX - Analyst Report) – rose 7.9% and 7.7%, respectively. These energy giants also found their places in the top six gainers of the blue chip index.

Encouraging Data Erasing Recession Fears

Some of the recently released economic data played an important role in reducing concerns about a recession in the U.S. economy. On the contrary, they provided assurance of a slow and steady recovery in the economy. The Bureau of Labor Statistics (BLS) reported that the economy was boosted by 242,000 job additions in February, beating the consensus estimate of 194,000. This also exceeded January’s upwardly revised figure of 172,000 by a wide margin. Unemployment remained in line with January’s significantly low rate of 4.9%.

Moreover, the Labor Department reported that core-Consumer Price Index (CPI), which excludes food and energy prices, gained 2.3% from the year ago level, witnessing its biggest increase since May 2012. Also, housing starts increased 5.2% from January to a five-month high last month, led by nine-year high gains in construction of single-family houses.

Separately, encouraging personal consumption, income and spending data and upward revision in the fourth-quarter GDP rate signal a gradually growing economy. The Fed highlighted at the recently concluded meeting that “economic activity has been expanding at a moderate pace despite the global economic and financial developments of recent months.”

FOMC Statement

At the two-day policy meeting on Wednesday, the Federal Open Market Committee (FOMC) decided to keep the interest rate flat between 0.25% and 0.50% and forecast two rate hikes instead of four this year. Though the Fed Chair Janet Yellen said that “concerns about global economic prospects have led to increased financial market volatility and somewhat tighter financial conditions in the United States,” she added that "the committee certainly thinks that risks to the outlook have diminished.”

Despite forecasting the inflation rate to remain below the 2% target “in the near term,” Yellen said: “The committee continues to feel that we are on a course where the economy is improving and inflation is moving back up.”

Key Sectors Riding on Broad-Based Gains

Currently, most of the broader sectors that were finding it difficult to finish in the green at the start of 2016 are in positive territory over the year-to-date frame. For instance, the broader technology sector – Technology Select Sector SPDR (XLK) – that declined nearly 8.1% from the start of the year through Feb 11, when markets hit a multi-year low, recovered strongly to post a 2.1% gain year to date. One of the Dow components from this sector – Verizon Communications Inc. (VZ - Analyst Report) – surged 16% since the start of 2016 and clearly outperformed other blue-chip companies over the period.

Separately, industrial is another sector that benefited significantly from these broad-based gains. The Industrial Select Sector SPDR (XLI) gained 4.6% in the year-to-date frame, reversing losses of nearly 7.2% in the earlier part of the year. Caterpillar Inc. (CAT - Analyst Report) and 3M Company (MMM - Analyst Report) gained 11.7% and 8.7%, respectively, since the start of this year. While Caterpillar emerged as the second biggest gainer among the Dow components during this time frame, 3M finished in the fourth spot. Meanwhile, another key gainer among the blue chip companies during the year-to-date time frame was Wal-Mart Stores Inc. (WMT - Analyst Report). Wal-Mart gained 10% during the period and was the third best among the Dow components.

Bottom Line

Banking on signs of stability and consistent gains over the past few weeks, it is likely that the markets have the potential to continue this positive trend at least in the near term. Moreover, a gradual pace of rate hike and increasing possibilities of an oil production freeze are expected to boost the markets, including the Dow, in the near future.