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As the Dow Jones rallies, can the index make up lost ground?

Wall Street traders were reassured by the latest US jobs report, which had a positive impact on performance across the board. Meanwhile, hopes remained high that Fed interest rates will once again be lowered, according to CNBC. However, despite the gains at the tail end of last week helping to recover some of the previous losses felt by the Dow Jones [DJI], the index still closed down 0.9%, the third losing week in a row.

However, last week was far more encouraging as a rally in the US economy lifted all sectors to one of the largest one-day rises since August. The S&P 500 advanced by 1.4% on Friday to close at 2,952.01 and the NASDAQ Composite [IXIC] also saw 1.4% spike to close trading at 7,982.47. Unlike the Dow and S&P 500, the NASDAQ did not decrease over the weak, but closed up 0.5%.


Dow Jones Industrial Average Index, Trading View, 07 October 2019

This strong performance off the back of a struggling US manufacturing sector, which prompted concern around a potential recession for the country earlier in the week. As a result of this, the Dow lost out by almost 800 points since July highs of 27,359.


US job market stabilises

According to the Bureau of Labour Statistics, the US economy has added 136,000 jobs in September, working hard against slowing economic growth, with the unemployment rate shrinking to a 50-year low of 3.5%. This was still 6.21% short of the reported 145,000 mark predicted by economists polled by Dow Jones.


Number of jobs added to US economy in September - 6.21% short of economists' predictions


“With the lowest unemployment rate in 50 years, the latest jobs report provides investors with some comfort that growth is slowing, not stalling,” global market strategist for JPMorgan Asset Management, Jai Malhi, told the Financial Times.

But while the figures were enough to assuage short-term recession fears, the Federal Reserve is still prepared to make the cuts necessary later in the year as some consider economic growth lacklustre at best.

Eric Rosengren, president of the Federal Reserve Bank of Boston told CNBC that he predicts just 1.7% of growth for the second half of 2019, while Federal Reserve chairman Jerome Powell, stated on Friday that the US economy is in a “good place”, but reiterated it is the central bank’s job to keep it this way. 

“With the lowest unemployment rate in 50 years, the latest jobs report provides investors with some comfort that growth is slowing, not stalling” - JPMorgan Asset Management global market strategist Jai Malhi


Safe havens flatline in response to rally

On Friday governments bonds showed a “mixed performance” as the yield of the 10-year US Treasury benchmark was trading down at -1.52%, equivalent to 1.4bps while the two-year Treasury yield - which remains more sensitive to short-term macroeconomic changes – was up by 1.6bps (1.40%), according to the Financial Times.

For a safe haven such as gold - usually a key indicator of the mindset of investors in uncertain markets - the job markets report caused a shedding of early gains for the second half of the year as gold futures traded flat at $1,506.70 on Monday (7 October).


What next?

While Friday’s rally has boosted short-term statistics across the board, the US economy isn’t out of the woods yet. Rob Croce, senior portfolio manager at Mellon told CNBC that he was “not convinced that the Fed will be as effective as it has been in dealing with economic downturns”. Croce pointed to volatility in the Treasury market recently, which was seen to push the 10-year US Treasury benchmark from 1.5% to 1.9% before this sharply reversed.”

“The environment feels very fragile to us,” Croce said, but went on to say that “the market has been operating under the assumption that the Fed has our back at that they’re omnipotent” as a consequence he says, the market have shaken off any political circumstances.

While Friday’s figures provided a short-term assurance the two major indices of the Dow and S&P 500 both suffering over the past few weeks and the Dow especially has a long way to go to close the recent gap. With the yo-yoing effect felt by trade war negotiations and the weaknesses in economies across the globe, long-term reassurances may be a long time coming.

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

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