Wall Street seems super-excited as the Dow crossed 27,000 on Jul 11, 2019 — a historic milestone — and the S&P 500 touched 3,000 for the first time in recent trading sessions on Fed’s rate cut optimism. Dow Jones moved past 20,000 for the first time in history in Jan 2017 (as one of the biggest beneficiaries of Trump’s presidential victory in late 2016), first closed above 26,000 in January 2018 and within just one-and-half years, the index breached the 27,000-hurdle.
Visa Inc. (V - Free Report) , Microsoft Corp. (MSFT - Free Report) , McDonald’s Corp. (MCD - Free Report) , Walt Disney Co. (DIS - Free Report) , American Express Co. (AXP - Free Report) took the Dow Jones to this height on Jul 11.
Let’s take a look what caused this rally?
Fed Rate Cut Optimism
Despite a solid jobs report for the month of June and signs of truce in U.S.-China trade war, Fed chief Powell said, “uncertainties about the outlook have increased in recent months.” He indicated economic slowdown in several international economies, which has a spiral effect on the U.S. economy. Trade developments, the federal debt ceiling and Brexit could derail U.S. economic growth. And the Fed especially appeared worried about soft U.S. inflation (read: Grab These ETFs & Stocks on Gold Rush).
Such remarks from the Fed chief rekindled hopes of a rate cut this year, should the need arise. Since a low rate environment is great for stocks, large-cap indexes like Dow Jones and the S&P 500 rallied. Also, the Dow Jones (up 16.1% this year) is cheaper than the S&P 500 (up 19.7%) and the Nasdaq (up 23.5%). So, valuation-wise too, the blue-chip index got support.
Furthermore, it has been noticed lately that Dow Jones shares a deep relationship with oil price movement. Though the energy sector rally spreads optimism over the broader market as a whole, in most cases, on a particular day of oil surge, the rise in the Dow Jones is steeper than that of the S&P 500, or vice versa.
Oil prices made a comeback of late post the OPEC deal on output extension. OPEC and Russia have decided to extend the oil production cut to 2020, in an effort to boost oil prices (read: OPEC Output Cut Extended to 2020: Will These ETFs Gain?).
Plus, geopolitical tensions in Middle East related to sanctions against Iran, U.S. sanctions against Venezuela and the latest API data of depleting U.S. crude inventories have favored oil. In any case, the continuous extension of output cut deal has been benefiting oil prices in recent years. United States Oil Fund LP (USO - Free Report) , is up about 30% this year. So, the Dow Jones index does have a reason to cheer (read: ETFs to Gain From the Oil Rally on US Crude Inventory Data).
Focus on Blue-Chip Stocks
The Dow Jones assigns greater weight to higher-priced stocks, which is one of the reasons behind the recent surge. Overall, blue chip stocks are performing exceptionally of late. Also, large-cap stocks have substantial foreign exposure and thus perform better in a weaker dollar environment — like what we are witnessing now thanks to a dovish Fed (read: Small-Cap ETFs Underperforming: Be Choosy With 5 Top Picks).
Now, since the Dow Jones is a price-weighted index, bullishness over this high-priced large-cap cohort has made the case for the Dow investing more appealing.
US-China Short-Term Trade Truce
Despite renewed trade tensions in May, the United States and China agreed to resume trade talks at the G-20 summit in Japan. Trump said that no additional tariffs on billions of dollars of Chinese products will be applied for the “time being.” Such short-term truce was enough to boost the industrials sector-heavy Dow index.
ETFs in Focus
Therefore, investors seeking a momentum play, can bet on SPDR Dow Jones Industrial Average ETF (DIA - Free Report) (a Zacks Rank #1 (Strong Buy), 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. Here, ProShares Ultra Dow30 (DDM - Free Report) and ProShares UltraPro Dow30 (UDOW - Free Report) are a couple of choices.
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