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Will Trade War & Inflation Worries Spoil Dow ETF Party?
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When Trump was elected as the President of the United States, the Dow Jones Industrial Average entered into a party mode. In its uptrend, the blue-chip index breached the 20,000-mark on Jan 6, 2017, kept hitting milestones at regular intervals and finally crossed 25,000 for the first time in its 120-year history on Jan 4, 2018. In 2017, the index jumped about 25%.
But the rally tumbled in the late January to early February period, when rising rate and inflationary concerns creeped in. So far this year, the index is in the red, having lost about 3.5% (as of Mar 22, 2018). The index is off 5.3% this month (as of Mar 22, 2018) and is on its way to post “its worst March since 2001,” when it fell 5.87%, according to reports by WSJ Market Data Group.
Inside the Plunge
Trump Tariffs
The latest bloodbath was caused by a series of import tariffs. Trump’s order to levy duties on steel and aluminum imports at the start of the month was followed by his latest order to impose about $60 billion in import duties on Chinese goods. Needless to say, trade war fears are rife at the moment.
Most recently, China announced plans for retaliatory tariffs on $3 billion of U.S. imports as its first hit-back against metals levies. China plans to impose tariffs on imports of U.S. pork, recycled aluminum, steel pipes, fruit and wine. However, China pressed for a dialog to sort out the issue.
Thanks to metal levies, the industrial-haven index Dow Jones’ performance came under question. Plus, China is a key market for Boeing (BA - Free Report) . Last September, the company said that it expects China to spend about $1.1 trillion over the next 20 years (read: Trade War Fears Rife: Likely ETF & Stock Winners and Losers).
With issues rising with China, Boeing shares (which takes about 9% of the Dow Jones) were hard hit, posing threats to SPDR Dow Jones Industrial Average ETF (DIA - Free Report) . Overall, the industrial sector is under pressure with Industrial Select Sector SPDR Fund (XLI - Free Report) shedding about 3.3%.
Rising Inflationary Pressure?
The tariffs are likely to result in an increase in raw material cost for manufacturers that use metals like steel and aluminum. Along with most market watchers, we too believe that companies will try to pass on some cost escalation to consumers. This in turn may flare up inflation.
Moreover, oil price is recovering lately thanks to tension in Middle East, falling output in Venezuela and Saudi’s plans to extend the OPEC output cut deal into 2019. If oil prices continue to recover, it may again put upward pressure on inflation (read: Energy ETFs Rally: Will the Gains Last?).
Tax Cuts Priced-In
One of the main tailwinds to the Dow Jones’ awesome journey last year was tax bill, passed in late December. This law cuts the corporate rate from 35% to 21%. However, most of the expected benefits from the bill is now priced in at the current level (read: Tax Bill: What ETF Investors Need to Know).
ETFs in Focus
Investors should thus be watchful about a few ETFs like DIA, Guggenheim Dow Jones Industrial Average Dividend ETF (DJD - Free Report) and iShares Dow Jones US ETF (IYY - Free Report) . Investors can also settle for leveraged Dow ETF plays as long as the trend favors them.
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Will Trade War & Inflation Worries Spoil Dow ETF Party?
When Trump was elected as the President of the United States, the Dow Jones Industrial Average entered into a party mode. In its uptrend, the blue-chip index breached the 20,000-mark on Jan 6, 2017, kept hitting milestones at regular intervals and finally crossed 25,000 for the first time in its 120-year history on Jan 4, 2018. In 2017, the index jumped about 25%.
But the rally tumbled in the late January to early February period, when rising rate and inflationary concerns creeped in. So far this year, the index is in the red, having lost about 3.5% (as of Mar 22, 2018). The index is off 5.3% this month (as of Mar 22, 2018) and is on its way to post “its worst March since 2001,” when it fell 5.87%, according to reports by WSJ Market Data Group.
Inside the Plunge
Trump Tariffs
The latest bloodbath was caused by a series of import tariffs. Trump’s order to levy duties on steel and aluminum imports at the start of the month was followed by his latest order to impose about $60 billion in import duties on Chinese goods. Needless to say, trade war fears are rife at the moment.
Most recently, China announced plans for retaliatory tariffs on $3 billion of U.S. imports as its first hit-back against metals levies. China plans to impose tariffs on imports of U.S. pork, recycled aluminum, steel pipes, fruit and wine. However, China pressed for a dialog to sort out the issue.
Thanks to metal levies, the industrial-haven index Dow Jones’ performance came under question. Plus, China is a key market for Boeing (BA - Free Report) . Last September, the company said that it expects China to spend about $1.1 trillion over the next 20 years (read: Trade War Fears Rife: Likely ETF & Stock Winners and Losers).
With issues rising with China, Boeing shares (which takes about 9% of the Dow Jones) were hard hit, posing threats to SPDR Dow Jones Industrial Average ETF (DIA - Free Report) . Overall, the industrial sector is under pressure with Industrial Select Sector SPDR Fund (XLI - Free Report) shedding about 3.3%.
Rising Inflationary Pressure?
The tariffs are likely to result in an increase in raw material cost for manufacturers that use metals like steel and aluminum. Along with most market watchers, we too believe that companies will try to pass on some cost escalation to consumers. This in turn may flare up inflation.
Moreover, oil price is recovering lately thanks to tension in Middle East, falling output in Venezuela and Saudi’s plans to extend the OPEC output cut deal into 2019. If oil prices continue to recover, it may again put upward pressure on inflation (read: Energy ETFs Rally: Will the Gains Last?).
Tax Cuts Priced-In
One of the main tailwinds to the Dow Jones’ awesome journey last year was tax bill, passed in late December. This law cuts the corporate rate from 35% to 21%. However, most of the expected benefits from the bill is now priced in at the current level (read: Tax Bill: What ETF Investors Need to Know).
ETFs in Focus
Investors should thus be watchful about a few ETFs like DIA, Guggenheim Dow Jones Industrial Average Dividend ETF (DJD - Free Report) and iShares Dow Jones US ETF (IYY - Free Report) . Investors can also settle for leveraged Dow ETF plays as long as the trend favors them.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>