The venerable Dow Jones Industrial Average has been on something of a roll recently.
From a low point in late December, America’s blue-chip index has ridden a generally positive uptrend, breaking key resistance points at 26,000 and, more tentatively, 27,000.
This morning, the Dow stood at 26,478.02, following a slight downward tick. But it should be noted that much of the general upswing has merely clawed back the ground lost during the last 12 months.
Intense White House pressure
On 1 October 2018, the Dow stood at 26,651.21, and exactly 12 months later it traded at 26,916.83.
After a volatile performance in the autumn of last year, it plunged to a low of 21,792.19 on 24 December and stayed below 25,000 until 30 January.
Come 1 July, it traded at 26,717.43 and drifted off a little to 26,118.02 by 3 September.
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Asset prices have been a key beneficiary of the about-turn on interest rates by America’s central bank, the Federal Reserve, early in the year. From December 2015 to December last year, the Fed had gradually raised the key federal funds rate, from the “emergency” range of 0%-0.25% in place since December 2008 to a range of 2.25%-2.5%.
Persuaded that the world economy was weakening, and under intense pressure from President Donald Trump to bring down borrowing costs, the Fed has made two cuts so far this year, reducing the range to 1.75%-2%.
As usually happens, stock prices have headed higher, as traders and investors have used abundant credit to chase assets.
The Dow, synonymous for many people with Wall Street itself, comprises a who’s who of American business and industry. From financial services there are JPMorgan Chase, American Express and Goldman Sachs, while high-tech takes in Apple, International Business Machines and Intel.
Manufacturing giants Boeing and Caterpillar are listed, as are retailers Walmart and Home Depot. Chevron and Exxon Mobil fly the flag for energy companies, while Johnson & Johnson and Merck do the same for the pharmaceutical sector.
A sticky ending?
The Dow has been criticised for its narrow focus – there are just 30 stocks in the index – and its old-fashioned image, given the word “industrial” suggests to some people the past rather than the future. Furthermore, as with London’s FTSE 100 index, much of the revenues earned by its member-firms come from overseas, making it, critics say, a poor guide to the health of corporate America.
Many prefer the broader-based Standard & Poor’s 500 index.
Defenders retort that the Dow is supposed to be a barometer of market sentiment rather than a precise representation of the stock market at any one time, and they add that, over the years, it has performed this role very well.
For now, then, the Dow seems headed upwards, powered in part by a partial return to easy-money policies by the Fed. But those with a sense of history may be wary. In July 1927, Benjamin Strong, head of the Federal Reserve Bank of New York, decided he would give “a little coup de whiskey” to the stock market, with lower interest rates.
The Dow took off like a rocket, only to fall to earth in the Wall Street Crash of October 1929.