The Dow Drops as Earnings, Politics Weigh on Markets

By Dan

Official White House Photo by Pete Souza.

After a long weekend, many investors expected to come back well-rested and ready for stock market gains. But a poor earnings report from Johnson & Johnson and concerns about rising political tension in advance of tonight's State of the Union address made early optimism evaporate. As of 11:20 a.m. EST, the Dow Jones Industrials were down by 95 points. Oil was back on the decline, with crude prices dropping below $47 per barrel, and gold continued its climb toward the $1,300 level as investors seek safety from greater uncertainty about the financial markets' future in 2015.

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Source: J&J.

On the earnings front, Johnson & Johnson fell 3%, leading the Dow lower. Even though the healthcare giant produced better net income than expected, investors focused on the huge negative impact of the rising U.S. dollar on the company's revenue. For the quarter, J&J produced currency-neutral sales growth of 3.9%, but 4.5 percentage points of negative currency effects pushed the company's reported revenue figures down 0.6%, which fell short of what investors had wanted to see.

Many investors believe the dollar will remain strong, especially against currencies in areas like Europe, where the economy is relatively weak. With some expecting the euro to fall to parity with the U.S. dollar, J&J could be hit especially hard in 2015, given that it gets more than a quarter of its overall sales from Europe. The company continues to rely on its pharmaceutical division for the bulk of its success, but it could take even stronger performance to overcome currency headwinds this year.

U.S. Capitol. Source: Wikimedia Commons.

Meanwhile, President Obama's address to Congress tonight promises to renew contentious relations between the administration and lawmakers. In the speech, the President will present several tax proposals that were pre-released over the weekend, including an increase in the top capital gains and dividend tax rates from 20% to 28% and the elimination of the stepped-up basis provisions for assets owned at death. In addition, a new fee of 0.07% of total liabilities would apply to large financial institutions. In exchange for these proposals, which the administration argues will apply almost exclusively to the top 1% of earners, new tax breaks would give credits to two-earner families, expand child care tax incentives, adjust education tax incentives, and expand access to retirement-savings options. Most analysts have concluded that the proposals have no chance of getting through a Republican Congress, but the rhetoric promises to reignite the debate among demographic groups in the U.S. over the correct direction of tax policy.

Tax reform, currency movements, and a host of other uncertainties facing the markets will take a long time to reach resolution. As a result, investors need to acknowledge the likelihood that further surprises could come at any time. That's an unavoidable aspect of long-term investing, but even though it means you have to suffer short-term setbacks, you can still be successful in the long run.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. 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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