The waning Trump trade appears to be back with a bang, at least for the Dow Jones Industrial Average (if not for the other two key U.S. equity gauges - the S&P 500 and the Nasdaq). On January 26, 2017, Dow hit the 20,000 mark for the first time in history. The index made several attempts to breach this key mark in late December, but ebbing Trump bump restrained it to touch that height.
However, as soon as Trump was sworn in as the U.S president, the Trump rally once again started to overpower. His pledges of higher fiscal spending and tax cuts acted as the main tailwind. Especially, the industrial sector deserves a mention on his plans of increased infrastructure spending. With Republicans taking control of both the House and Senate, Trump is expected to enact all his market-friendly policies seamlessly.
Also, manufacturing numbers point to a recovery in the U.S. The flash Markit Manufacturing PMI in the U.S. rose to 55.1 in January of 2017 from 54.3 in the previous month, surpassing market expectations of 54.5. The reading came in at the highest since March 2015. An upswing in the manufacturing sector can act as a strong tailwind to the Dow Jones Industrial Average's forward growth. After all, SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) invests about 20% weight - the highest allocation - in the industrial sector.
Another bullish factor that drove the Dow to 20,000 was favorable earnings. Corporate earnings growth for Q4 of 2016 is on the way to be the highest in eight quarters. As per Earnings Trends issued on January 26, 2017, Finance (earnings growth of +11.4% on +3.2% revenues), Aerospace (earnings growth of +15.1% on +2.1%), Construction (+13.8% earnings growth on +13.4% revenue growth) and Basic Materials (+28.8% earnings growth on +6.4% revenue growth) and Medical (+18.2% earnings growth on +6.6% revenue growth) are likely to post stellar growth this reporting cycle.
For example, Boeing (NYSE:BA) was one of the main contributors to the Dow's achievement on January 25 after topping estimates over its recent quarter. Caterpillar (NYSE:CAT) also pushed the Dow higher helped by expected benefits from Trump's boost to infrastructure.
What Lies Ahead?
Investors should note that though the Dow crushed the 20,000 mark January 26, the S&P 500 and the Nasdaq Composite dropped. So, market sentiments are not that upbeat as it seems to be. The 30-stock index Dow has been rallying because of the ongoing strength (or expected gains) in those 30 particular stocks, not of the broad-based market power.
If we look at the history, analysts pointed that "the first time the Dow cracked 10,000, for example, it was followed by gains of almost 20% over the next year. Momentum tends to sustain itself, and the same energy that breaks 20,000 may continue for some time afterward."
Then again, there are arguments like "each 1,000-point milestone is less monumental as the percentage increase from one to the next becomes smaller. Back in 1999, a 1,000-point move represented 10% of the index. Today, a 1,000-point move is just 5%." Plus, at the current level, investors should be careful about the market correction too, especially after a pretty bullish market rally.
Still, since Trump has already started considering a round of his promised policies - including reviving Keystone Pipeline, pushing for using only U.S. steel and mulling over an idea of border tax along Mexico - just after taking seat, Dow ETFs may run a little longer.
Dow ETF DIA now has a positive weighted alpha of 22.30 and volatility of 5.72%. Investors should note that a moderate but positive weighted alpha hints at more gains, though for not too long. However, the fund is less likely to see high volatility.
Investors should also note that DIA is yet to enter the oversold territory with a relative strength index of 68.59. So, a few more days of gains may be possible.
Apart from DIA, investors can also take a look at other forms of Dow Jones Investing via ETFs. iShares Transportation Average ETF (NYSEARCA:IYT) with a positive weighted alpha of 38.90 and volatility of 12.92%, Guggenheim Dow Jones Industrial Average Dividend ETF (NYSEARCA:DJD) with a positive weighted alpha of 21.20 and volatility of 8.33%.
Investors can also settle on leveraged Dow ETF plays as long as the trend favors them. Two choices are ProShares Ultra Dow30 (NYSEARCA:DDM) with a positive weighted alpha of 51.84 and volatility of 12.54% and ProShares UltraPro Dow30 (NYSEARCA:UDOW) with a positive weighted alpha of 86.16 and volatility of 17.30%.