Signs Good for Dow Jones to Break All-Time High

By Dale Gillham | Published 07 October 2019

The Dow Jones Index fell as much as 4 percent at one stage last week before rallying towards the end of the week to close down just 0.92 percent.

The story on the S&P 500 was very similar with the SPX down 3.57 percent at one stage, only to rally and close down 0.33 percent for the week.

My outlook for the US markets is that the Dow will fall over the coming month to between 25,200 to 24,500 points, which at current levels means the Dow Jones Index and the S&P500 will roughly fall around 6 to 10 percent.

That said, the Dow Jones Index is showing good signs that it will break above its all-time high before Christmas 2019.

Last Friday we saw the release of the jobs and wages data for September, and while it was expected that jobs growth would slow, the figure was not as bad as expected with jobs growth in September slowing to 136,000 new jobs compared to 168,000 in August.

The slowdown occurred mainly in the retail and manufacturing sectors, which may have been a reaction to Trump’s tariffs and trade war with China, as the increased tariffs hit home. There has also been a softening in US consumer spending in addition to continuing losses in manufacturing jobs, all of which could have impacted new jobs growth.

Inflation dropped to 1.7 percent in August, although the Fed is expecting this to rise above 2 percent, so there is no real cause for concern. Real wages growth was around 1.2 percent, while unemployment was around 3.5 percent, which is the lowest rate since 1969.

The Dow Jones Index is currently only trading around 5 per cent higher than it was nearly two years ago. As a consequence, investors are being tempted to invest overseas to gain diversification and better returns.

While the US has the largest stock market in the world by capitalisation, research shows that it is not the best performer. That said, research also indicates that investing in overseas markets does not make economic sense.

A book released by Princeton University Press in 2002 titled “Triumph of the Optimists” researched the performance of stock markets in 111 different countries. The top ten in terms of capitalisation included the USA, Japan, UK, France, Germany, Canada, Italy, Netherlands, Switzerland and Hong Kong with the USA accounting for 46 percent of the world’s total capitalisation.

That said, when looking at the annualised percentage return for each market, the top five were 1. Australia, 2. Sweden, 3. South Africa, 4. USA and 5. Canada.

Now while you might think this is an argument for investing overseas, the results in the book show that over 103 years, the difference between these markets, in terms of returns, was not much. If we consider the top return achieved by Australia was 7.4 percent and compare this to the USA in fourth position, which achieved a return of 6.3 percent, you can see why adding any additional risk or complexity by investing offshore, the benefits would not outweigh the opportunity.

And that still rings true today. As I always say, if you can’t make money in your own backyard, why would you consider investing offshore?

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