The Dow Jones drifted higher on Monday after an explosive gap higher at the start of the session. With the stock market close to record highs, the Federal Reserve’s rate decision and Apple earnings are the most critical upcoming risk events for the Dow.
Shortly before the closing bell, the Dow Jones Industrial Average had advanced 138.49 points or 0.51%, lifting the index to 27,096.55.
As the S&P 500 (+0.60%) moved to record highs, the Nasdaq (+1.03%) also performed strongly while the Dow was once again lagging the other major US stock market indices.
Nonetheless, risk appetite was clearly strong, as earnings have been resoundingly positive this quarter. Many of the more vulnerable sectors have proven to be far more resilient than many analysts believed they would be when faced with Trump’s trade war.
Providing additional support to the stock market, there was some generally positive news in the UK after Boris Johnson accepted the EU’s offer of another lengthy delay. French President Emmanuel Macron had initially appeared reluctant to stall talks again, and there were fears Johnson would also be unwilling to agree after his “dead in a ditch” comments.
In the US, the Dow got a boost from the fact that President Trump believes trade war negotiations are “ahead of schedule.” Given that US companies have performed quite well regardless of the trade war, there is plenty of optimism that things can continue to improve should tariffs be entirely removed.
All this progress on trade makes the job of the Federal Reserve tough this Wednesday. With the Dow close to all-time highs, cutting interest rates remains a controversial policy matter within the FOMC.
Fed Chair Jerome Powell has often cited the trade war as a reason to proceed cautiously, and stock market bulls will be nervous that the removal of tariffs might lead the Fed to cut back stimulus. A rate cut is already priced into markets, so it will be the forward guidance that traders pay the most attention to.
Chief International Economist James Knightley maintains the view that a rude awakening for the Dow Jones from interest rates is unlikely. The ING economist believes that the downward trend in US macro data continues to suggest that additional stimulus will be required from the Federal Reserve, stating,
“The Federal Reserve has been keen to characterise the two rate cuts in July and September as “insurance” against external threats posed to the US economy (trade & weak global growth) rather than the start of a significant easing cycle. However, the deceleration in domestic demand, weaker wage pressures and declining inflation expectations suggests that economic weakness is spreading and that more action may be needed in the coming months.”
The Dow 30 might have had nearly half of its stocks in the red, but this didn’t stop the index from leaping more than 100 points.
Microsoft stock (+2.54%) hitting record highs was the main driver, as the software company secured a lucrative $10 billion deal with the Pentagon.
Apple (+0.89%) posts its earnings on Wednesday, and investors are still enthusiastically buying the stock ahead of this critical risk event for AAPL. Hopes are high that strong demand for the iPhone 11 will help pad the report.
McDonald’s lagged the Dow Jones with a miserable 1.49% loss, while Exxon Mobil (-0.65%) and Coca-Cola (-0.62%) also muted the index’s rally.
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Last modified: September 23, 2020 1:12 PM