The Dow Jones Industrial Average (DJIA) is hovering near a record high as investors shrug off the rising inflation fears. The index closed at $34,466, up by more than 400 points on Thursday. It surpassed 15% this year and 80% from its March’s low last year.
Dow Jones shrugs off the inflation data
The Dow Jones, S&P 500, and Nasdaq 100 indices held steady on Thursday after data showed that consumer prices are rising and the labor market is tightening.
The Bureau of Labor Statistics (BLS) data showed that the headline Consumer Price Index (CPI) rose by 5% in May – the fastest growth since 2008. In the same period, core CPI that excludes volatile items like food and energy rose by 3.8% – the highest reading since 1992. Prices rose by 9.7% in the past three months to May this year.
The annualized inflation figures were significantly better than what analysts were expecting. But they were also boosted by the fact that consumer prices fell sharply in the first few months of the pandemic. Still, in the past few months, the prices of key items like steel, aluminum, and oil have more than doubled, helped by the rising demand from China and the shipping bottlenecks.
The inflation data came at the same time as the initial jobless claims numbers. The data showed that the initial and continuing jobless claims numbers declined to a post-pandemic low last week.
In theory, the strong jobs and inflation numbers should pull the Dow Jones lower. This is because they imply that the Federal Reserve will need to intervene and hike rates to prevent the economy from overheating. Still, the Fed has said that these numbers are transitory and will start moderating in the next few months.
The Dow Jones possibly rose after a team of bipartisan senators reached an agreement on an infrastructure package. According to the Wall Street Journal, the ten senators called for a $579 billion federal spending without increasing taxes. The proposal will see the government spend $974 billion in five years and $1.2 billion if the program extends for ten years.
The progress came two days after Joe Biden called off previous negotiations with Republicans. The Republicans are opposed to any infrastructure package that will see higher tax increases.
An infrastructure package is good for Dow Jones because it will benefit several constituent members directly. This includes companies like Caterpillar, Honeywell, Dow Inc., and Verizon.
Top movers in the Dow Jones
Most companies in the Dow Jones index have jumped this year. The best performing constituent is Goldman Sachs, whose shares are up by 42% this year. It is followed by Walgreens Boots Alliance, American Express, Chevron, JP Morgan, and Caterpillar. Financials have done well because of the potential for higher interest rates, while energy companies have done well because of higher oil prices.
On the other hand, the worst performers in the Dow Jones are Nike, Merck, Apple, and Walmart. These companies have lagged due to the overall rotation from the stocks that benefit from the lockdown to the favored ones during the reopening.
Dow Jones forecast
The daily chart shows that the Dow Jones index has been in a solid upward trend in the past few months. While the momentum has waned, the index is still substantially above the 50-day and 100-day Exponential Moving Averages (EMA). The Relative Strength Index (RSI) shows that a bearish divergence pattern is emerging.
The bullish trend will likely continue as long as the index is above the 50-day and 100-day Moving Averages.