Why Financials Are Leading the Dow Jones' Surge Today

Positive comments from New York Fed President William Dudley are pushing financials and the DJIA up.

May 21, 2014 at 1:32PM
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Financials are leading the Dow Jones Industrial Average (DJINDICES:^DJI) up after multiple members of the Federal Reserve spoke late yesterday afternoon. The Federal Reserve releases the minutes from its April 29-30 Federal Open Market Committee meeting at 2 p.m. EDT this afternoon. As of 1:15 p.m. EDT the Dow was up 142 points to 16,512. The S&P 500 (SNPINDEX:^GSPC) was up 11 points to 1,884.

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Source: Finviz.com.

Yesterday, William Dudley, president of the Federal Reserve of New York, spoke at the New York Association for Business Economics. Dudley told the assembled listeners that it would be "a considerable period of time" between when the Fed ends its long-term asset purchases and when it begins raising rates. "Considerable" means different things to different people; the last time Fed Chairwoman Janet Yellen made similar remarks, she clarified that she meant roughly six months. Dudley went on to say:

If the economy is stronger than expected, causing the excess slack in the labor market to be absorbed sooner and inflation to rise more quickly than forecasted, then lift-off is likely to be pulled forward in time. If, instead, economic growth disappoints, inflation stays unusually low and the labor market continues to exhibit evidence of considerable excess slack, then lift-off will likely be pushed back in time.

Given Dudley's permanent seat on the Federal Open Market Committee, his views are important to consider, because the longer the Fed keeps short-term interest rates low, the longer banks benefit. As such, 26 of 30 Dow stocks are up today, with financials including Goldman Sachs (NYSE:GS), Visa, and JPMorgan Chase leading the way.

Goldman Sachs is today's top Dow stock, up 1.7% to $158.97. While other banks including Deutsche Bank, JPMorgan Chase, and Barclay's have been selling off their commodity and bond trading businesses, Goldman has elected to follow a different strategy. The bank and its executives believe the hard times will pass. At Goldman's recent annual shareholder meeting in Dallas, Texas, CEO Lloyd Blankfein told Quartz:

I've been doing this over 30 years. I think it's a vanity to say something that has worked is not going to work from this moment forward. ... I think it would be a risk with our shareholder's franchise if we had built big franchises over decades and let them go because the markets haven't been volatile for the last few quarters.

Today, however, the bank did announce it is selling its metals-warehousing business, which it acquired in 2010. The move to sell the business, called Metro International Trade Services, has long been expected, as the company first began the process last year. The business stores metals that are traded on the London Metal Exchange. The LME and the warehousing businesses associated with it have faced regulatory scrutiny and lawsuits after large users of metals including MillerCoors and Coca-Cola complained that its practices were leading to long waits and higher prices for metals. Metals producers generally took the warehousing businesses' side, as they benefit from higher prices.

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Dan Dzombak can be found on Twitter @DanDzombak or on his Facebook page, DanDzombak. He has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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