One of the most significant market events of late is the upside breakout in multiple US equity indices.
Dow Industrials, one of the oldest stock benchmarks that comprises of 30 industrial members, surged to new all-time highs (see Featured Chart). The rally broke the key resistance at 27,000 decisively. Unless the index regresses and surrenders its recent gains in the near term – ie, establishes a failed upside breakout – Dow’s path of least resistance is up, with the target set at 28,000.
As an aside, it is worth noting that Dow bottomed out in Mar 2009 at around 6,500. Since then, its bull market gain exceeds 300%! What is more, the current bull market is more than a decade old. By historical standards, this is one of the longest bull markets in a century.
All bull markets as long as this normally ends with a ‘melt up’.
Question 1: What’s pulling the market higher?
In the early phase of the bull market (2009-’11), it was the unwinding of oversold conditions accumulated in 2008 that set off a huge rally. During 2012-15, it was ‘QE Infinity’ that sustained the bull run. The election of Trump – and the subsequent huge corporate tax cut – led to a ‘Trump Rally’ (Dec’16 – Jan’18). Most recently, Dow’s recent spike was caused by a reversal of the Fed’s hawkish monetary policy.
Remember that a year ago, investors were staring at 3% 10 year Treasury yield and four potential hikes in 2019. Now the yield is 2% and a rate cut. A sea change in the monetary policy. “Don’t fight the fed” certainly applies here now.
Question 2: Can this bull run be sustained?
Against the backdrop of a projected rate cut, market liquidity is likely to be ample. But, we have to wait if the forthcoming corporate results are good and in line with the market pricing. If these results are below expectations, some price volatility may be expected.
Also, the market is very optimistic about the conclusion of the Sino-US trade war. Whether such as view is warranted remains a question mark.
For the moment, momentum is certainly with the bulls.
Question 3: Can the US-led equity pull European markets higher?
In some ways it already has. Many equity benchmarks have rebounded significantly from their May lows. But it is clear that US markets are the runaway leaders. Relative strength tend to persist in market, so expect more outperformance from the US.
Question 4: What about emerging markets?
Emerging markets are having a harder time because of the economic volatility arising from the slowing growth. Just recently, China reported the slowest growth in many decades. This will a lot of spillover effects into other regional economies – and, possibly, some western economies too. Therefore, EM stock markets probably would struggle to produce an uptrend as clear as Dow’s. Choppy volatility expected.
Question 5: Which sectors are looking good?
Technology stocks remain the clear leader. Microsoft is powering to new highs; Amazon is flirting at its prior highs too. Facebook, Google, and others such as Intuit are trading near the upper side of their long-term range. I anticipate these stocks to extend their outperformance.
QQQ’s uptrend is reaching for the big psychological 200 level.
Jackson has over 15 years experience as a financial analyst. Previously a director of Stockcube Research as head of Investors Intelligence providing market timing advice and research to some of the world’s largest institutions and hedge funds.
Expertise: Global macroeconomic investment strategy, statistical backtesting, asset allocation, and cross-asset research.
Jackson has a PhD in Finance from Durham University.