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Dow Uber-Bulls Fantasize About 28,000 – Here’s Why Bears Fear a Slump

Last Updated September 23, 2020 12:50 PM
Harsh Chauhan
Last Updated September 23, 2020 12:50 PM

The Dow Jones Industrial Average and the broader US stock market are having the time of their lives even as the US-China trade war keeps raging on and key economic indicators move in the wrong direction.

The Dow now sits comfortably above the 27,000 point mark, having gained over 10% since the beginning of June.

And market optimists believe that the rally is far from over. In fact, many Wall Street analysts are already talking about  the Dow eclipsing 28,000.

Record Rally Brings Out the Dow’s Uber-Bulls

Chart showing the Dow's rally.
The Dow sprang past 27,000 to set a new all-time high on Friday. | Source: Yahoo Finance

The analysts estimate that key components of the index such as chemical company Dow Inc., aircraft manufacturer Boeing, heavy machinery manufacturer Caterpillar, and aerospace player United Technologies will deliver handsome double-digit upside over the coming year. But their estimates are based on one crucial factor – a resolution to the US-China trade war.

The performance these and other Dow components could depend heavily on a deal between Beijing and Washington thanks to the index’s outsized exposure to China. These stocks and the broader stock market have been driven up by the recent ceasefire in the trade war and the agreement that negotiations would resume soon.

However, skeptics warn that the two sides still remain miles apart on longstanding sticking points.

Already, Trump is publicly complaining that China hasn’t increased its purchases of US farm exports as Xi Jinping supposedly promised it would.

However, Bloomberg  reports that China denied that it had agreed to increase its US agricultural imports. The report also states that China rejected Trump’s demand to boost purchases of farm goods beyond what the two countries agreed in Argentina last year.

So the ceasefire between the two countries might not last for long. TheStreet  reports that Steve Hanke, professor of applied economics at Johns Hopkins University, predicts that the trade war could very easily get much uglier.

“Now, the Chinese, not only are they big, they’re communist…they’re not going to be humiliated, the Chinese have a different history than Japan, and they’re not going to be beat around like the Japanese were in the 80s and 90s.”

Don’t rule out a slump to 23,000

dow jones industrial average
Further trade war complications could send the stock market 17% lower. | Source: Drew Angerer / Getty Images / AFP

The failure of the US and China to reach a resolution would crush analysts’ dream of the Dow hitting 28,000 and place major stocks under pressure.

In an interview  with MarketWatch, JPMorgan’s chief equity strategist Dubravko Lakos-Bujas predicted that an escalation of the trade war would send the S&P 500 on a steep plunge to 2,500 – a drop of 17% or 513.77 points from its current level.

“If for whatever reason we go down the wrong path, and we get escalation of the trade dispute, then we have a downside of 2,500.”

A comparable pullback would thrust the DJIA down to 22,685, erasing its mammoth 2019 rally and turning 28,000 into little more than a pipe dream.

As it is, bears warn that the stock market seems to be getting ahead of itself thanks to the Fed, which has hinted at a rate cut  as insurance against any economic headwinds.

But with earnings season about to get underway , the Dow could get a shock if the bottom line performance is not up to the mark.