Dow Jones Industrial Average Forecast: DJIA moves ahead for fourth straight day
- Dow Jones Industrial Index benefits with the rest of the market from lower inflation readings.
- Producer Price Index for October fell half a percentage point on a monthly basis.
- Retails Sales for October declined slightly from the previous month.
- Following a positive earnings result from The Home Depot, Dow investors wait on Cisco, Walmart results.
The Dow Jones Industrial Average (DJIA) is advancing for its fourth straight session on Wednesday as the market cheers on October releases from the Producer Price Index (PPI) and US Retail Sales. Both economic indicators added to Tuesday’s belief that the economy is steadily melting down into the much-heralded “soft landing” scenario in which inflation subsides without a harsh effect on consumer spending and employment.
The DJIA has advanced about 2% this week through Wednesday, and the index has gained about 0.4% on Wednesday itself. The S&P 500 and NASDAQ Composite advanced healthily during the session but were barely postive by the closing bell.
The US House of Representatives passed a bipartisan stop-gap measure that will continue funding the Federal government at present levels for a few more months, and this political event has removed yet another worry spot for the markets through the end of the year.
The Home Depot (HD) reported a positive quarter earlier this week, so the fundamentals of the DJIA seem to be on better footing. Cisco Systems (CSCO) earnings will be released after Wednesday’s market close, and Walmart (WMT) earnings should direct the index on Thursday.
Dow Jones News: With inflation receding, the Fed may cut rates sooner than expected
Although Monday saw gains continue from the prior week, Tuesday’s Consumer Price Index (CPI) release for October was the initial starting gun for this week’s rally. Headline CPI showed inflation was flat between September and October, which beat economists’ prediction and was much lower than the September print.
The DJIA closed up more than 1.4% on Tuesday due to this indicator alone as trader’s pulled forward their expectation for next year’s Federal Reserve rate cutting target to earlier on the calendar. Traders now give a 26% chance that the central bank begins cutting interest rates in March, according to the CME FedWatch Tool. For the May meeting, a majority (58%) of the market expects the fed funds rate to be either 25 or 50 basis points below the current 5.25% to 5.5% range.
Tuesday’s CPI reading was lent even more credibility on Wednesday, when the PPI scaled back by half a percentage point in October. The PPI shows production prices in the US economy, and lower energy prices contributed to a pullback in manufacturing costs this time around.
On Wednesday, US Retail Sales for October dipped 0.1% on a monthly basis rather than the 0.3% that was consensus. This reading ushers in further proof that the economy may be cooling off in light of high interest rates but is not in danger of a severe downturn. The soft landing was once laughed at but is now the state religion on Wall Street.
Home Depot signals positive signs for Cisco, Walmart
The Home Depot is one of America’s premier retailers for the construction and home renovation sphere. As such, it becomes a proxy for how the US consumer is doing. Tuesday’s Q3 results were a parable for the US economy experiencing the so-called soft landing thesis.
The Home Depot bested Wall Street consensus on the top and bottom lines despite lots of negatives among the details. Consumers are choosing smaller home renovation projects as average customer ticket spending fell from a year ago. Comparable sales also fell 3.5% YoY.
However, The Home Depot is not experiencing a major pullback in revenue but more of a lull in action. Nothing in the results shows that US consumers are all that pressured, and management said that revenue in the current fiscal year would decline just 3% or 4%.
The Home Depot rallied on the earnings results, which sets things up nicely for two other Dow components – Walmart and Cisco Systems.
Walmart is a major retailer like The Home Depot, just in a different category. On the back of Wednesday’s Target (TGT) earnings hoopla – TGT stock rallied 17% – prospects for Walmart are also looking up. The company is expected to grow revenue about $7 billion from a year ago and increase per share earnings marginally.
Cisco earnings come after the close on Wednesday. Lots of the focus is on the networking hardware company’s attempt to acquire cybersecurity firm Splunk. However, analysts still expect Cisco to grow sales more than 7% from a year ago despite the tough macro situation for hardware producers.
Dow Jones FAQs
The Dow Jones Industrial Average, one of the oldest stock market indices in the world, is compiled of the 30 most traded stocks in the US. The index is price-weighted rather than weighted by capitalization. It is calculated by summing the prices of the constituent stocks and dividing them by a factor, currently 0.152. The index was founded by Charles Dow, who also founded the Wall Street Journal. In later years it has been criticized for not being broadly representative enough because it only tracks 30 conglomerates, unlike broader indices such as the S&P 500.
Many different factors drive the Dow Jones Industrial Average (DJIA). The aggregate performance of the component companies revealed in quarterly company earnings reports is the main one. US and global macroeconomic data also contributes as it impacts on investor sentiment. The level of interest rates, set by the Federal Reserve (Fed), also influences the DJIA as it affects the cost of credit, on which many corporations are heavily reliant. Therefore, inflation can be a major driver as well as other metrics which impact the Fed decisions.
Dow Theory is a method for identifying the primary trend of the stock market developed by Charles Dow. A key step is to compare the direction of the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) and only follow trends where both are moving in the same direction. Volume is a confirmatory criteria. The theory uses elements of peak and trough analysis. Dow’s theory posits three trend phases: accumulation, when smart money starts buying or selling; public participation, when the wider public joins in; and distribution, when the smart money exits.
There are a number of ways to trade the DJIA. One is to use ETFs which allow investors to trade the DJIA as a single security, rather than having to buy shares in all 30 constituent companies. A leading example is the SPDR Dow Jones Industrial Average ETF (DIA). DJIA futures contracts enable traders to speculate on the future value of the index and Options provide the right, but not the obligation, to buy or sell the index at a predetermined price in the future. Mutual funds enable investors to buy a share of a diversified portfolio of DJIA stocks thus providing exposure to the overall index.
What they said about the market – David Kostin
Goldman Sachs equity strategist David Kostin says 2024 may not be a banner year for the stock market as the S&P 500 has already rallied 17% in 2023. In an investor note on Wednesday, Kostin said he expects the index to end 2024 just 5% higher than the current level at 4,700. Kostin says the market is pricing stocks correctly at the moment, owing to consensus around 2024 US GDP growing at 2.1%.
“Our macro forecasts imply a benign outcome for equities, but the current starting point will limit the potential appreciation for the benchmark US equity index in 2024.”
Dow Jones Industrial Average forecast: Reason for optimism
Two weeks ago, the Dow Jones index broke out of its descending topline, and it hasn’t stopped since. The primary reason to trust in the current rally is that the DJIA basically gapped up through the 34,300 to 34,700 consolidation zone in just two sessions.
Now the DJIA is hovering just below the 35,000 resistance point. This level held bulls at bay back in late August and mid-December. A break here will give the market a free shot at the 2023 high of 35,679 from August 1. A pullback could push the index back to support near 34,700.
Dow Jones Industrial Average daily chart