American Express Stock Is Soaring Past the Dow

The Dow Jones Industrial Average (DJINDICES: ^DJI  ) is up after inflation came in low, signaling that the Fed will likely continue its quantitative-easing program. As of 1:25 p.m. EDT the Dow is up 126 points, or 0.83%, to 15,306. The S&P 500 (SNPINDEX: ^GSPC  ) is up 0.7% to 1,650.

There were two U.S. economic releases today.

Report

Period

Result

Previous

Consumer Price Index

May

0.1%

(0.4%)

Core CPI

May

0.2%

0.1%

Housing starts

May

914,000

856,000

Investors are anxiously awaiting the Federal Open Market Committee statement that will be released tomorrow at 2 p.m. EDT. Currently, as part of its quantitative-easing program, the Federal Reserve is purchasing $85 billion worth of long-term assets each month in an effort to keep rates down and the economy moving forward. The Fed is trying not to surprise investors and has said it will keep the purchases going until unemployment falls to 6.5%, inflation rises past the Fed's target range, or long-term inflation expectations take off.

Investors got some news today on the second of those three. Earlier today the Department of Labor reported that the Consumer Price Index rose 0.1% in May for a year-over-year change of 1.4%. Core CPI, which excludes food and energy prices, rose 0.2% for a year-over-year change of 1.7%.

US PCE Inflation Rate Chart

US PCE Inflation Rate data by YCharts.

While many investors track the CPI as their favored measure of inflation, the Fed's favorite measure is the Department of Commerce's price index for personal-consumption expenditure, or PCE, which has been trending lower than the CPI the past year. We have to wait until the end of the month for the Department of Commerce to release May figures for the PCE, which is expected to remain well below the Fed's 2% to 2.5% target.

In other news, housing starts rose a seasonally adjusted 58,000 in May to 914,000 but missed analyst expectations of 953,000. It's important to note that housing starts are continuing their slow trend back toward their historical average of 1.5 million. The housing market has been slowly recovering and signs appear that it is getting stronger. Yesterday, the National Association of Home Builders reported that for the first time in more than six years, more homebuilders were optimistic about the housing market than were pessimistic.

One Dow stock winning big
American Express (NYSE: AXP  ) is among the Dow's leading stocks today, up 1.6%. American Express stock hit an all-time high last Monday of $78.61 but then became the worst-performing Dow stock of the week, losing 5.2% after a downgrade from Barclays. There is a large "wealth effect" that comes with an improving housing market, which means people feel wealthier as their home value rises and therefore spend more. This is good news for American Express and rival payment processors Visa (NYSE: V  ) and Mastercard (NYSE: MA  ) . It's doubly good for American Express, which not only processes transactions but also extends credit to its customers, whereas Visa and Mastercard work with banks who extend credit. The different business models can be seen in a recent table from Visa's annual report.

Visa and Mastercard boast many times more payment volume, transactions, and cardholders as American Express, yet they both have net incomes about half that of AmEx. American Express' focus on high-income customers is also an advantage, because high-income individuals have more money in the stock market and are gaining wealth from the market's relentless rise.

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