Visa is Pulling The Dow Higher

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 down 17 points to 15,867 at 1:30 p.m. EST, with 23 of 30 stocks in the red, as investors await tomorrow's Federal Open Market Committee statement. The Dow would be down far more were it not for its largest component, Visa (NYSE: V  ) which is up 2.4%. The S&P 500 (SNPINDEX: ^GSPC  ) was down five points to 1,781.

The Dow is structured as a price-weighted index, so Visa's stock price -- now at $213.52 -- has the largest effect on the average's daily movements. Last week, a federal judge approved a $5.7 billion settlement between Visa, MasterCard (NYSE: MA  ) , and retailers regarding fee-setting collusion between the two credit card giants. While the settlement is large it removes an area of uncertainty for those considering investing in the two companies. In a sign of confidence for the business, MasterCard recently upped its dividend 83% and authorized a $3.5 billion share buyback.

The economy
There were four U.S. economic releases today.

Report

Period

Result

Previous

Consumer Price Index

November

0%

-0.1%%

Core CPI

November

0.2%

0.1%

Current account

Q3

-$95 billion

-$97 billion

Home builders index

December

58

54

The one to pay attention is the inflation report. The CPI was unchanged month over month, below analyst expectations of a 0.1% rise, for a 12-month change of 1.2%. Core CPI, or CPI excluding food and energy, was up 0.2% month over month for a 12-month change of 1.7%. The CPI was led up by a 0.3% gain in housing prices, which make up one-third of the measure.

The Fed's favored measure of inflation is the Personal Consumption Expenditures index, as the goods it measures are updated monthly to reflect consumer spending. The CPI is only updated once every two years, providing a more accurate view of the inflation consumers are experiencing.

US PCE Inflation Rate Chart

US PCE Inflation Rate data by YCharts.

PCE inflation has been below CPI inflation the past few years, as housing makes up only 15% of PCE while it represents 30% of CPI.

This is important as the Federal Open Market Committee is meeting today and tomorrow to discuss the Federal Reserve's actions. The Fed is currently pursuing two policies to stimulate the economy and the jobs market. The first is the zero interest rate policy in which the Fed lets banks borrow from it at rates now targeted between 0% and 0.25%. The second policy is quantitative easing through the Fed's monthly $85 billion purchases of long-term assets. The Fed is debating the second program; it has said previously that tapering would begin when unemployment hits 7%, which it has.

Tapering can be seen as a good or a bad thing. Good in that it means the Fed believes the economy is strong enough to improve with just the central bank's zero interest rate policy. Tapering could be bad, though, as it means the market would lose the daily steroids that have been pushing it to new highs this year. I have written multiple times about why I think the stock market is overvalued, and I'd hesitate to put money to work in the broad market at these levels.

The Motley Fool has always taught that Foolish (capital "F") investors don't invest in the broad market. We invest in great companies at good prices, continue to educate ourselves, and hold on to our great companies over the long term. The market will fluctuate (sometimes massively), but great companies will win out over the long run.

Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2768198, ~/Articles/ArticleHandler.aspx, 12/20/2014 7:28:47 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement