Dow Afternoon Report: Financials Gain on Bond Sell-Off

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

The Dow Jones Industrial Average (DJINDICES: ^DJI  ) is relatively unchanged after two better-than-expected reports on U.S. manufacturing activity are tapering fears. Financials are pulling the Dow higher, with heavyweights Visa (NYSE: V  ) and Goldman Sachs (NYSE: GS  ) both up more than 1% on the prospect of higher long-term rates. As of 1:30 p.m. EST the Dow was unchanged at 16,084. The S&P 500 (SNPINDEX: ^GSPC  ) was up 3 points to 1,809.

There were two U.S. economic releases today.

Report

Period

Result

Previous

ISM manufacturing index

November

57.3%

56.4%

Markit U.S. PMI

November

54.7

51.8

Today, both the Institute for Supply Management's manufacturing index and Markit's Purchasing Managers' Index both came in well above analyst expectations. The ISM's index hit a two-year high of 57.3%. Readings above 50 indicate expansion with higher levels meaning a faster rate. The growth in the manufacturing index was led by jumps in new orders and employment.

Source: Institute for Supply Management

The better-than-expected data raises the chance that the Fed will taper its $85 billion worth of long-term-asset purchases. Treasury bonds and mortgages sold off on the news with the yield on the 10-year treasury rising to 2.8% and the yield on 30-year fixed-rate mortgages rising to 4.38%.

10 Year Treasury Rate Chart

10 Year Treasury Rate data by YCharts

Rising rates are good for financials that make money on the spread between short-term rates and long-term rates. Members of the Federal Reserve Board have been out saying that while the Fed will taper asset purchases at some point, its zero-interest-rate policy will likely remain until sometime between 2015 and 2017. Financials will benefit by being able to borrow at 0.25% while lending out at the higher long-term treasury and mortgage rates.

As such, today's Dow leader is Visa, up 1.34% to $206.19, with Goldman Sachs up 0.91% to $170.48. As the Dow Jones Industrial Average is a price-weighted index -- the big reason I have called the Dow useless -- these two stocks are holding the Dow up almost on their own as they make up nearly 15% of it.  

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