Whew. After yesterday's steep sell-off, the Dow Jones Industrial Average (DJINDICES:^DJI) is up almost 2%, gaining 601 points at 3:07 p.m. EDT on July 20. Today's gains are a relief for many investors, who were concerned that yesterday's decline could be the beginning of a double-digit decline for the stock market due to the delta variant coronavirus surge.
But alas, calmer heads are prevailing today. Shares of some of yesterday's biggest losers, American Express (NYSE:AXP) and Boeing (NYSE:BA), are up more than 4% today, while Goldman Sachs (NYSE:GS) shares are up over 3%. Banking behemoth JPMorgan Chase's (NYSE:JPM) shares are up 2%, offsetting much of yesterday's declines.
Positivity is prevailing as investors "buy the dip"
Yesterday's sell-off was certainly stoked by fears that the global economic recovery was at risk of a retraction. This was a key reason why bank stocks like American Express and Goldman Sachs fell; by and large, a healthy, growing economy is key to their prospects for growing profits. Yet at the same time, we have learned that the biggest banks fared relatively well during the 2020 recession. Losses from loan defaults have been much smaller than expected, and the quick actions to bolster their balance sheets last spring prepared them well to ride out the massive economic shock of the global economy being essentially shut down.
JPMorgan's recent earnings showed a continued positive trend, too. Credit quality has held up well, and spending on travel and entertainment is surging, helping to offset the cooling off of its investment banking business, which delivered extraordinary results last year.
American Express, which is also a bank -- it is the lender to its credit card customers -- has gotten off to a great start to 2021, after coming out of last year largely unscathed. Sure, its earnings did fall in 2020 with the big slowdown in the travel and entertainment that drives a huge share of its earnings. But while its customers may not have been able to travel, attend concerts, or otherwise spend as normal, they also weren't defaulting on their AmEx payments. As a result, the billions it has set aside in case of defaults has largely gone unneeded.
This combination of balance sheet and credit strength, along with the prospects for a continued economic recovery -- even if potentially muted or even delayed by the delta variant -- has investors coming back to AmEx shares today.
Boeing's gains today are a similar story. Investors are viewing yesterday's sell-off as an overreaction, and putting more stock in the recovery of its order book for commercial aircraft in recent weeks than fears of a return to lockdowns.
IBM earnings meet expectations
Shares of tech stalwart IBM (NYSE:IBM) are up modestly after the company reported its second-quarter results after market close on July 19. IBM, which has transformed into a cloud and services business in recent years, reported revenue up a modest 3% to $18.7 billion, and flat after adjusting for divested businesses. However, cloud services revenue is up 15% over the past 12 months, while Red Hat revenue is up 20%. The company has also made progress on its balance sheet, reducing debt by $6.4 billion since the end of 2020.
As a result of the transition to more profitable revenues and lower debt, operating income and adjusted gross margins are on the rise. IBM reported free cash flow of $9.7 billion over the past 12 months, and said that it returned $1.5 billion of last quarter's $1.6 billion in adjusted free cash to investors in dividends.
What happens next?
Today's gains are a nice boost for investors who got rattled by yesterday's Dow sell-off, the biggest of 2021 so far. Don't be too quick to assume it's going to be smooth sailing from here. Volatility is just a part of investing in stocks. And while that can be painful in the short term, it's a big reason why stocks continue to prove the best way to build wealth over the long term.
Stay tuned for more coverage of Dow Jones stocks in the days to come.