There is nothing stopping the Dow it seems.
The Dow Jones Industrial Average kicked off October at 22,468 points. Four weeks later and the index is up 4.2%, closing at 23,431 points.
Over the past 18 months, the index has moved more than 5000 points, up from 18,000. Meaning the index hits a new 1000-point milestone on average every 3.6 months.
The only thing scarier than the Dow’s bull run perhaps is that there’s nothing around to stop it.
To put its run into perspective, consider this: The Dow has not had a fall of greater than 3% in 2017. Not one. That’s incredible, if not worrisome.
Now, that should really hit home when you realise that the Dow hasn’t wobbled once in spite of a potential stalemate over Trump’s proposed tax reform and growing tensions between the US and North Korea.
It’s worth pointing out that I don’t believe the Dow is the most useful measure of economic performance in the US.
The top 30 companies included in the Dow index are generally the biggest in their respective industry. They’ve hit the mature part of the business cycle. What they provide investors with is reliable dividends, rather than being companies in the expansion phase of the cycle.
Importantly, the Dow no longer measures US productivity. Instead, the Dow, at least in my view, is an indicator of consumerism and consumption in the US. Eight of the Dow’s constituents are directly related to consumption. A further three companies included in the Dow, American Express Company [NSE:AXP], Visa Inc. [NYSE:V], JPMorgan Chase & Co. [NYSE:JPM] are in the business of selling credit. Arguably, they could be linked to consumption as well.
Even though the S&P 500 is a far better measure of US economic performance, the Dow is moving to dizzying heights, and it’s impossible to turn away from.
Importantly, you should be aware of what is driving the Dow higher each day.
One key factor driving the Dow is that an awful lot of money is finding its way into US-listed exchange-traded funds (ETFs).
Take a look at this. The chart on the left shows you that money is flowing into stocks:
Source: The Daily Shot
[Click to enlarge]
And the chart on the right indicates that most of that money is going into large-cap stocks.
In fact, the Wall Street Journal reported that ETFs bought more than US$100 billion (AU$130 billion) of stock in the first quarter of this year. Furthermore, ETFs were on track to purchase a total of US$390 billion (AU$508 billion) of US equities over the course of 2017. That is more than the US$362 billion (AU$471 billion) spent in the prior two years.
By the end of June this year, ETFs owned more than 6% of all listed US equities.
ETFs are useful vehicles for investors looking for broad exposure to an industry or sector of the economy. But there are concerns that investors are blindly diving into ETFs, leading to investor complacency.
Complicating this is the rise in ETF investors, causing both volume and volatility to fall in the Dow. In other words, the Dow is going away because the number of investors in the market is smaller. There are more buyers in the market, and fewer sellers. With less volume in the big-cap stocks — and mostly buyers coming — stocks get more room to rise than they would if they market was evenly matched up with sellers.
Pushing the Dow higher as well is the ‘fear of missing out’. The incredible 4000-point rise in the Dow is backing up the idea that if investors don’t jump in now, they could miss out on even more gains later on.
Then there’s this idea that the US bull market is late in the cycle, and that what we are witnessing is the last phase of a ‘melt-up’. That’s when euphoria takes over, and investors clamber in and buy stocks at all costs.
But what if the bull market actually has much longer to run?
Source: Credit Suisse; The Daily Shot
[Click to enlarge]
According to data from Credit Suisse going back to 1949, the US market is currently seeing its longest and slowest market recovery in history. Making it highly likely that the bull market has much further to run.
Chances are that we could be looking at the Dow touching 24,000 points before the end of November. Heck, the index may even reach 25,000 by January next year.
Editor, Markets & Money
PS: While the US market is going gangbusters, the Aussie market has been stuck in a sideways trend since April. Hardly inspiring. As the S&P/ASX 200 nudges the 6000-point mark for the second time this year, we’ve been hunting for investments that could potentially be ready to move rapidly higher, regardless of what the XJO does. You’ll find our latest report here.