Wall Street’s venerable Dow Jones Index is showing renewed signs of life after a torrid three months.
The blue-chip benchmark of 30 stocks has taken a big tumble since February, but the past few weeks have seen it clambering out of a trough.
As with market indices around the world, the Dow’s prospects are closely bound up with the outlook for the spread of the coronavirus and the chances of lock-down type restrictions being eased or lifted.
Dow Jones predictions next week: momentum pattern looks ominous
These restrictions have been particularly damaging to some of the Dow’s best-known constituent companies. But more generally, the immense damage to the world economy arising from official attempts to get the virus under control has undermined the market value of leading businesses.
Looking for the Dow Jones predictions for next week, there are a number of factors that may buoy the index, as we shall see.
First, a look at the performance since late winter. On the face of it, this has been pretty dire. On February 7, the Dow traded at 29,102.51; three months later on May 6, it stood at 23,664.64. That’s a loss of more than 18 per cent.
Furthermore, the pattern of three-monthly momentum looks ominous. The high point was right back in February, at 29,551.42 on February 12, while the low point was seen more recently, on March 23 at 18,591.93.
But when you narrow the focus to look at the last month alone, the picture brightens: the 23,664.64 close on May 6 compared with 22,653.86 a month earlier, on April 7. In other words, a modest but not insignificant increase of nearly 4.5 per cent.
And the monthly momentum pattern is also more cheering. The low point was seen on April 21, at 23,018.88, while the peak was achieved on April 29, at 24,663.86.
Ought we to pay much attention to just one month’s performance? In normal times, it may well make more sense to look at the three-monthly or even 12-monthly data. But these are far from normal times So rapid has been the development of the coronavirus story and so many have been the twists and turns, that studying trading patterns across three months is of limited usefulness; and what happened 12 months ago is almost entirely irrelevant.
Looking to the Dow Jones next week, key economic data from America’s Bureau of Labor Statistics may help, or hinder, the Dow in its attempts at recovery. Tuesday April 12 sees the release of April’s Consumer Price Index, perhaps the first full set of monthly US inflation numbers since the crisis became firmly established across the country.
‘Jobs miracle’ derailed
The great fear here is not that inflation is running out of control, as in the Seventies, but that it is running into the sand. Earlier this month, the Organisation for Economic Co-operation and Development (OECD), the club of rich nations, reported that inflation across its member countries had dropped from an average 2.3 per cent in February to 1.7 per cent in March.
In the US, the leading OECD economy, food-price inflation was considerably lower than in the OECD as a whole, while the plunge in energy prices by almost 6 per cent was much greater than the average of just under 4 per cent. The April 12 figures will be taken as a health check of the vitality or otherwise of the economy, and a sluggish or even negative rate of price increases will stoke fears that the epidemic is tipping the US and the world into a new Great Depression.
OECD secretary general Angel Gurria has sought to calm such fears, saying the virus is likely to induce a recession rather than a depression, but all eyes will be on the official job openings and labour survey for March, due on Friday May 15. Already it is widely accepted that the coronavirus epidemic and the official response to it has derailed America’s “jobs miracle”, as it has in the UK, another “Anglo-Saxon” free market economy with high employment levels.
In February, the US unemployment rate was at an historic low of 3.5 per cent of the workforce, but this figure is predicted to have ballooned to 16 per cent last month.
Joe Biden may reassure
The Dow itself is made up of some of the great names in American business. But not all will have been similarly affected by the crisis. For example, it does not take an economist to guess that oil giant ExxonMobil will be finding a world of plunging energy demand particularly uncongenial; or that Boeing will be feeling the icy chill from what could be a steep decline in demand for aircraft, given the woes of the aviation industry.
By contrast, Home Depot, which allows do-it-yourself enthusiasts to order home-improvement materials on-line, may well benefit from the urge of locked-down Americans to get around to all those little jobs about the house. Similarly, footwear group Nike, famous for its running shoes, may find its goods in greater demand as housebound people in many countries resolve to keep fit during the lockdown.
Longer term, the prospects for the Dow Jones index are tied in with public confidence in the US and elsewhere. President Donald Trump’s poll ratings seem to be holding up, although his taste for strongly worded statements – he recently compared the coronavirus to the 1941 attack on Pearl Harbor – may alarm as well as reassure.
Getting closer all the while is November’s presidential election. Regardless of individual political opinions among traders and investors, the eventual triumph of former Vice President Joe Biden may well reassure Wall Street that the alternative to Mr Trump is a moderate Democrat rather than a candidate thought hostile to capitalism, such as Bernie Sanders.
So, as a new week begins, the momentum would seem to be behind a gradual recovery in the Dow. But after all that has happened during the past few months, nothing can be taken for granted.