Dow Jones Forecast as a Market Anomaly Emerges

Jul 9, 2021 05:49 PM ET
Dow Jones Forecast as a Market Anomaly Emerges

The Dow Jones declined by more than 250 points on Thursday as global stocks retreated. The S&P 500 and Nasdaq 100 also fell about 0.50%. Elsewhere, in Europe and Asia, indices like the DAX, FTSE 100, and Nikkei 225 declined by more than 1% as investors worried about global growth.

Global growth concerns

In general, the Dow Jones and other American indices have done relatively well this year, having gained by more than 10%. This performance is mostly because of the relatively accommodative monetary policy by the Federal Reserve. 

The government has also supercharged the recovery by providing trillions in the stimulus. The Biden administration is expected to get its infrastructure package that is estimated to cost almost $1 trillion. He has also proposed spending trillions of dollars on things like climate investments and child care. 

At the same time, the American economy is doing relatively well. Recent data showed that the country’s unemployment rate has dropped from a post-pandemic high of 15% to 5.9%. Companies in the hospitality and aviation sectors are even struggling to find new workers. 

However, there are concerns that this growth is losing momentum. For example, data published by the Institute of Supply Management (ISM) showed that the performance of the non-manufacturing sector declined slightly in June. This is notable since the non-manufacturing sector is the biggest employer in the country.

Further data by the Bureau of Labor Statistics (BLS) showed that the number of Americans filing for jobless claims rose to 374,000 last week. This was worse than the median estimate of 350,000.

Therefore, the Dow Jones partly declined as investors worried that the strong recovery experienced in the second quarter is starting to fade. Also, there are concerns about supply bottlenecks.

Bond performance

The sharp decline of the Dow Jones coincided with the volatility in the bond market. This week, bond prices have jumped as investors bet on slow growth. Bond yields, which move inversely to yields, declined to the lowest level since early February. The benchmark 10-year yield declined to 1.26%, which was substantially lower than the year-to-date high of 1.77%.

The performance of the Dow Jones and US bonds has pushed some analysts to talk about a market anomaly. This is because, in theory, stocks tend to rise when bond yields fall. This is because falling yields usually lower the cost of borrowing for constituent companies. It also signals that the market expects interest rates to remain lower for longer.

Another part of the anomaly is on the performance of bonds after the latest FOMC minutes. Bond yields declined even after hawkish Federal Open Market Committee (FOMC) minutes. The minutes showed that some policymakers were starting to think about tapering asset purchases seriously. 

Meanwhile, investors are getting fearful. The fear and greed index has declined from last week’s 45 to 32. 

fear and greed index chart

The put and call options have moved to fear while safe-haven demand, stock price strength, and stock price breadth are all in the fear zone while market momentum and junk bond demand are in the greed zone.

Dow Jones technical analysis

The Dow Jones has been in a strong upward trend in the past few months. It has risen by more than 90% from its lowest level in 2020. Subsequently, the index is at the same level as the 50-day Moving Average. It is also at the middle of the ascending black channel, while the Average True Range (ATR) has declined. Average True Range (ATR)

Therefore, the index will likely remain at the current range as investors continue focusing on the bond market.

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