The Dow Jones Industrial Average (DJIA) is not in a bubble, says Ascent Wealth Partners managing director Todd Gordon. He argues the Dow is currently consolidating, and a larger breakout awaits.
Gordon said there is “so much talk” about the Dow’s overextended rally and the stock market bubble. But historical market cycles show U.S. stocks remain in a healthy consolidation phase.
Throughout history, the Dow has seen a cycle of three components: a selloff, a bear market, and new all-time highs.
As an example, Gordon laid out the long-term cycle from the 2000 dot-com bubble to the 2008 housing bubble.
A full market cycle begins by investors initially taking profit, causing the Dow to decline and enter a bear market.
Eventually, investors return and push the stock market upwards, leading the Dow to recover.
Then, a consolidation phase kicks off, strengthening the basis of the newfound rally. It resets the market as stocks stabilize, preparing the Dow for a new bull market.
According to Gordon, the Dow sees a similar pattern. The March lows present the take-profit dip, and in the past five months, the stock market saw a V-shape recovery.
If the Dow follows the same pattern as before, it would likely consolidate around 30,000. According to Gordon, that would lead the market to aim for new highs over time :
We have the same pattern again. Okay, so we go down into the end of 2018… then make a new high, we go down to the March lows making a new low, convincing everyone that we’re going to get a sustained bear market, and now look at what the market is doing.
Atop strong technical factors that support the Dow’s ongoing uptrend, there are also clear fundamental macro catalysts.
On CNBC’s Closing Bell, St. Louis Fed President James Bullard said the recession is over.
Yet, according to Bullard, the Fed would retain low-interest rates for a long time despite strong economic growth.
As CCN.com previously reported, Federal Reserve chair Jerome Powell announced a plan to target a 2% average inflation rate.
The policy change allows the Fed to raise inflation temporarily if it anticipates slowing economic growth. As long as the average rate remains at 2%, the Fed has the authority to let inflation run high.
Many economists and strategists remain skeptical about the Fed’s new policy. Watch the video below.
Rock-bottom interest rates, record-high global liquidity, and favorable financial conditions create a solid macro backdrop for U.S. stocks. Coupled with the Dow’s ongoing consolidation phase, the prospect of a long-term rally is relatively high.