Market Outlook

Will the Dow Jones index head higher this autumn?

The Dow Jones Industrial Average has had a positive 2019 to date beginning January at 23,284 points, rising to highs of over 27,000 in July, before falling back to the present level of 26,904. 

Overall this year, the Dow has risen by around 15%, higher than the 7% rise on the FTSE 100, but below the 18.6% climb of the S&P 500.

As with all major indices there have been periods of volatility throughout the year, including in the last fortnight where uncertainty over global trade and US domestic economic strength has weighed on investor sentiment.

15%

The Dow's year-to-date climb

The week beginning 19 August saw the Dow move from 26,000 down to 25,600, before lifting back through the 26,000 mark and heading close to 27,000. 

Overall for August the index has dropped 1.7% - its second worst month this year.

 

What’s caused the dip?

The main investor caution followed a re-heating of the US-China trade war with new tariffs being imposed by both sides. The US added tariffs to foodstuffs such as ketchup, fruit and vegetables and even musical instruments. The Chinese put a levy on goods such as US crude oil. 

The tariffs dispute also impacted US consumer sentiment with a survey from the University of Michigan noting the largest one month drop in seven years. 

Analysts were also concerned by a series of inverted bond yield curves during the month which often signals an upcoming recession.

However, sentiment began to lift this week on news that Washington and Beijing had agreed to hold high-level talks in early October.

The news-flow has certainly ignited the interest and concern of the American public with, according to Nicholas Colas, co-founder of DataTrek Research, Google searches for “Dow Jones” for the week of August 11th to 17th being up 28% from previous highs in May.

This happens, Colas added, when “Main Street […] are worried about stock-market volatility”. It is when even those Americans who don’t own shares realise that an uncertain market could signal recession and job losses.

“Americans are watching,” he said.

“Americans are watching” - Nicholas Colas on the American public's spiked interest in the Dow

 

What’s next?

So, what can they and we expect in the months ahead? Will the health of the Dow Jones index continue to dominate thoughts or will search results return to previous interests such as the baseball play-offs and Kim Kardashian?

Whether the rise in positive sentiment seen so far in September continues will be significantly affected by the resumption of US-China talks in October. Will a breakthrough be made or will bluster and political points scoring continue to hold sway?

President Trump has a great deal of political capital tied-up in the dispute and won’t want to be seen giving anything away to the Chinese. The talks will certainly be thorny and if they are viewed as a ‘last chance saloon’ to mitigate the crisis then expect a market downturn if they turn frosty. 

Trump has already outlined plans for more rounds of tariffs in October and December, on imports including customer staples like Apple iPhones.

This could make US consumers even more cautious, bad news for the economy in the run up to the holiday season.

There are also signs that the trade dispute is hitting sectors aside from consumerism, with the US manufacturing sector shrinking for the first time in 3 years in August. The pace of jobs hiring in the US also slowed during the month.

 

Is the Dow a “bubble”?

Aside from the economic threats there has also been a warning from veteran trader Michael Burry that the Dow Jones has become a ‘bubble’, which could be ready to pop.

He believes it has inflated via too much passive investing in index funds such as ETFs, which disguise the true valuation of underlying stocks. If he’s right, and he’s been right before having predicted the sub-prime mortgage crisis, the market could be in line for a correction.

“The key call is that the U.S. is not headed for a recession” - White House trade adviser Peter Navarro

On the more optimistic side is White House trade adviser Peter Navarro, who says the Dow could hit 30,000 and above if the US, Mexico and Canada trade deal is signed in September and the Fed lowers interest rates.

JP Morgan has also forecast a stocks rally to the end of the year. Its chief global equity strategist Mislav Matejka believes the strength of corporate earnings in the final few months of the year will outweigh concerns around US/China, resulting in positive returns for equities.
“The key call is that the U.S. is not headed for a recession. The consumer is strong, interest rates are coming down and there are signs that global growth will rebound,” he said.

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