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Will Dow Jones ETFs Rule in 2024?

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After growing more than 24% in 2023, the S&P 500 finished its first trading day of the new year in the red. Meanwhile, the Nasdaq logged its worst day since October, after advancing more than 42% in 2023. Surprisingly, the laggard of the three key U.S. equity gauges – the Dow Jones Industrial Average (up about 13% in 2023) – managed to close the first trading day of 2024 in the green.

Will the Dow Jones be a winner in 2024? Investors seeking to tap the potential winning trend of the Dow Jones can consider SPDR Dow Jones Industrial Average ETF (DIA - Free Report) , iShares Dow Jones U.S. ETF (IYY - Free Report) , First Trust Dow 30 Equal Weight ETF (EDOW - Free Report) and Invesco Dow Jones Industrial Average Dividend ETF (DJD - Free Report) . Investors who want a leveraged exposure may bet on ProShares Ultra Dow30 ETF (DDM - Free Report) and ProShares UltraPro Dow30 (UDOW - Free Report) .

Let’s delve a little deeper.

Market Projections

Some analysts believe that the economy's strength and the Federal Reserve's dovish tone as key factors in the market's positive trend. Thus, the further strength in the Dow Jones is anticipated, reflecting a shift from focusing on potential risks to recognizing positive developments.

Revised Rate Cut Expectations

After raising the policy rate by 5.25 percentage points since March 2022 – in one of the Fed’s fastest and biggest rate hike campaigns – it has now held the rate steady since July on cooling inflation. Now, in contrast to earlier projections of a 0.50% rate cut, the Fed now anticipates a series of three 25-basis-point rate cuts in 2024.

The central bank foresees the peak of the fed funds rate at 4.6% in 2024, down from the previous projection of 5.1%, indicating a 0.75% rate cut in the upcoming year. The federal funds rate is expected to be falling to 3.6% – indicating four quarter-point cuts – by 2025. No Fed officials see rates higher by the end of next year.

Inflation and Economic Growth Projections

The Summary of Economic Projections (SEP) revealed the Fed's core inflation outlook, expecting it to peak at 2.4% next year, lower than the previous 2.6% projection. The Federal Reserve expects a further decline in inflation to 2.2% by 2025.

Notably, the core Personal Consumption Expenditures Index, the Fed's preferred inflation measure, showed a reading of 3.5% for October, down from 3.7% in September and 4.3% in June. The Fed’s target for this index is 2%.

The Fed forecasts economic growth for 2023 to hit 2.6%, considerably higher than its September projections of 2.1% growth. For 2024, GDP growth is expected to be 1.4%, slightly lower than 1.5% forecast in September. GDP growth data for 2025 is kept constant at 1.8%.

Steepening Yield Curve in the Cards?

As recessionary fears are ebbing, inflation has been falling and the Fed is likely to cut rates from 2024, a steepening of the yield curve is expected next year. A steepening yield curve is great for bank stocks as the pattern boosts banks’ net interest rate margins. Since Financials take about 20.7% of the Dow Jones’ portfolio, the scenario is a key plus for the Dow Jones.

Information Technology Rally to Continue in 2024

Buoyed by steadily decreasing inflation and a simultaneous reduction in the magnitude and number of interest rate hikes by the Fed, the technology sector has witnessed an astonishing rally in 2023. This happened, tech stocks outperform in a low-rate environment. Despite its higher valuation, the tech rally is likely to gather more pace in 2024 due to low rates.

A lower interest rate will decrease the discount rate, which in turn will raise the net present value of investment. Moreover, many of these companies rely on credit from chip sources to fuel their growth.

Relatively Cheaper Valuation

Cheaper valuation is another tailwind. At the current level, Dow Jones has a P/E of 16.82X, whereas the S&P 500 has a P/E of 17.86X and the Nasdaq-100 has a P/E of 22.70X. This was because the Dow Jones suffered a lot in the first half of 2023, which provided the index the scope to fare better from the second half.



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