I had seriously thought of making this a 20,000 point-free zone but I suppose that would have been just as childish as making the Dow’s breaching of this benchmark level the sole focus of the day.
So the Dow Jones Industrial Average, which many regard as deeply flawed and in that each of the 30 component companies contributes just one share and that therefore, before we even begin, there is no consideration to the size or market cap of the companies included. In terms of reflecting the “real economy”, the DJIA means absolutely nothing and yet it is the stock index to end all stock indices.
Now we have pictures of floor traders prancing around wearing t-shirts and baseball caps, mostly printed up quite a long time ago, marking the occasion. I heard one commentator in New York declare that 20,000 points has suddenly moved from being a resistance level to becoming a support level. Any passing chart technician will confirm that to be total clap-trap. 20,000 might mean something on a psychological level but technically level it means no more than do 19.989 or 20,136. Technically, in fact, the first breaching of any given level means nothing until it has been tested and verified three times. Thus, technically speaking, until the index has broken back down and then risen back above the 20,000 level three times, it is not deemed to have been properly confirmed.
Not that anybody seems to care that much as they bask in the afterglow of the “Trump bump”. In the greater scheme, this is chicken feed. In January 1987 the Dow stood at around 1,895 points. By August 25 it had risen to its closing high of 2,722.42 points, representing a 44% rise in the index in a mere eight months. The great crash followed in October by which time the market had fallen in 39 days to 1,738 points or by 35% from the peak only to close the year at just under 1,939 points and, albeit not a lot, up on the year. I recall at the time standing in Cannon Street in London and seeing a BMW 3 series – there were lots of yuppies with “debadged” 3-series so that one could not see whether it was a 316 or a 325i – with the licence plate “DJ 3000” drive by and wondered whether it was going to have stones thrown at it.
So yesterday the market jumped above 20,000 points from the bell and never dropped below it again. The big push came from Boeing, which reported lower earnings and profits but which still beat analysts’ expectations and the stock leapt by 4.24%. Given the spurious way in which the Dow is calculated, this alone impacted the index by 46.6 points. Caterpillar, which loves any talk of infrastructure spending, rose on the executive order calling for “the wall” to be built. On the other side of the Street, bond prices fell as the 10-year treasury yield backed up to touch on 2.54% in intraday trading. Consensus seems to be that the next Fed tightening will not occur at the FOMC meeting on February 1 but March 15 is a hot favourite for the next step in the normalisation of monetary policy. At 128bp, the 2s/10s curve is still a bit off the recent high of 135bp but this could go a lot further as the long end tries to anticipate and price where the current tightening cycle will end. Current Fed speak give us no clues for, unless I’m mightily mistaken, the FOMC doesn’t know either. How could they in light of the unpredictable outcome of the Trump administration’s protectionist rhetoric and its impact on inflation?
Meanwhile, the VIX index closed last night at 10.81, not quite an all-time low but certainly heading in that direction. One might have expected that the sharp rise in prices would push this volatility index higher as investors choose to put on the odd index option as a hedge against record levels but this does not appear to be the case. So far all the eggs are still in the higher and higher basket. Let’s face it, the average dividend yield on the Dow is still 2.73%, well ahead of 10-year treasuries as opposed to the S&P where the yield has fallen to 1.99%.
Strictly speaking, as broad indices, the yield on the Dow and the S&P should not be compared with the 10-year yield but to that of a sensible duration risk-weighted portfolio of bonds and, remarkably, the maturity yield on the five-year note is exactly that of the dividend yield on the S&P, namely 1.99%. Therefore, at 2.73% dividend yield the Dow still looks cheapish and destined to outperform the S&P. A cut in corporate tax rates would surely benefit more internationally exposed Dow stocks more and the lure of special dividends driven by a possible repatriation of profits currently held overseas should neither be disregarded nor underestimated. Big picture moves aside, Q4 earnings have been looking good across the board. Look out today for Caterpillar, Biogen, Bristol-Myers Squibb, Ford Motor and Fiat Chrysler Automobiles as well as Dow Chemical and Diageo.
Europe battles on with Greece floundering but with much of the rest of the eurozone looking more sprightly. With a working paper due to come out of the ECB today, which notes that low inflation is caused more by individual shocks than a broad-based and generic malaise, a review of loose monetary policy might find itself called for sooner rather than later. Early elections in Italy are now looking more likely than they previously had which would give us another cause to feel unsure of ourselves. I still can’t see any major electoral upsets in the Netherlands, France or Germany but Italy is a very different story.
And finally:
Trump: “In little over a week after I take office, China will fall into a slump. Factories will shut down, shops will close, stock markets will not trade, and government will grind to a halt. The wealthy will flee overseas with their families, citizens desperately trade their currency for food, doors all across the country will be plastered with red notices and the empty streets will reek of lingering gunpowder. The people, with nothing to do, will turn to day-long drinking and gambling. Children will roam the streets begging for money. So sad.”
China Foreign Ministry: “That’s Chinese New Year…”