Can the Dow Close a 5.3 Percent Gap to Its August Record While 5.2 Percent Yields Weigh on Its Heaviest Stocks?

Key Highlights

• The Dow Jones Industrial Average fell 0.67 percent to 51,481.51 on September 28, about 5.3 percent below its August 5 record close of 54,349.12, a move reflected in the SPDR Dow Jones Industrial Average ETF Trust (NYSEARCA:DIA).
• The Blue-Chip average is down roughly 3.2 percent in September from its August 31 close near 53,186, putting a five-month winning streak that ran through August at risk.
• Rate-sensitive heavyweights Goldman Sachs (NYSE:GS) and Caterpillar (NYSE:CAT) have weighed as the 10-year Treasury Yield topped 5.2 percent, its highest level since 2007.
• The Dow was up 7.8 percent year to date as of September 25, trailing the S&P 500's 13.1 percent gain, with big bank Earnings due on October 13.

Three Losing Weeks, Then a Costco-Aided Bounce

The Dow's September has been a grind. It fell about 2 percent in the week ended September 18, its worst week since March and a third straight weekly loss. It then snapped that streak with a 0.28 percent gain in the week ended September 25, helped by a 478.64 point, or 0.93 percent, jump on Friday to 51,828.62. That rally came as oil eased about 2 percent on hopes of a Strait of Hormuz reopening, lifting cyclical stocks, and as Costco Wholesale (NASDAQ:COST) reported fiscal fourth-quarter EPS of USD 6.75 against a USD 6.55 consensus on Revenue of USD 95.7 billion. Monday's reversal, after President Trump rejected Iran's proposal, erased most of that bounce and pushed the SPDR Dow Jones Industrial Average ETF Trust (NYSEARCA:DIA) back toward its September lows.

Price Weighting Magnifies the Rate Shock

The Dow is price weighted, so high-priced shares carry outsized influence. As of early September, Goldman Sachs (NYSE:GS) accounted for about 11.6 percent of the index and Caterpillar (NYSE:CAT) about 9.1 percent. That concentration in financials and industrials leaves the average exposed to borrowing costs. On September 22, as the 10-year yield reached 4.98 percent, Goldman lost 1 percent to USD 948.60 and JPMorgan Chase (NYSE:JPM) dropped 3 percent to USD 340.23, subtracting 105 and 75 points from the Dow respectively. On September 28, financials fell 1.14 percent and industrials 1.00 percent across the S&P 500, while Boeing (NYSE:BA) fell 6.2 percent. The Fed's September 16 hike had already cost the Dow 1.2 percent on the day, more than double the S&P 500's 0.5 percent decline.

Bank Earnings and Data Will Decide the Streak

Avoiding a September loss would require a gain of about 3.3 percent in the final two sessions, based on simple arithmetic from Monday's close to the August 31 level. That is a tall order ahead of August PCE data on September 30. The next catalyst for the index's heaviest sector arrives on October 13, when JPMorgan Chase (NYSE:JPM), Goldman Sachs, Wells Fargo and Citigroup are scheduled to report. FactSet data show analysts expect 29.1 percent S&P 500 earnings growth for the third quarter, and bank commentary on net interest income, Credit quality and dealmaking will test that optimism. The Yield Curve offers mixed signals: the 2s10s spread widened to about 36 basis points by September 25, a potential tailwind for bank margins. Investors following the SPDR Dow Jones Industrial Average ETF Trust (NYSEARCA:DIA) will watch whether that steepening outweighs higher funding and credit costs.

Where Things Stand

Not in the near term. The Dow would need roughly 5.6 percent to regain its 54,349.12 record from Monday's close, based on simple arithmetic, and its price weighting toward Goldman Sachs and Caterpillar keeps it tied to a 10-year yield above 5.2 percent. The SPDR Dow Jones Industrial Average ETF Trust (NYSEARCA:DIA) is likely to track rates and bank earnings more than technology sentiment into October. A calmer Bond Market after this week's PCE and payrolls data, plus solid bank results on October 13, would be needed before a serious run at the August high.