Investors Give the Dow a Perfect 10

Investors have judged that the Dow Jones Industrial Average (DJIA) deserved a perfect 10 this week by bidding up this large capitalization group of stocks for 10th straight day. Until the past week, these vaunted blue chip Dow stocks have significantly lagged the more tech heavy indices such as the Nasdaq Composite or S&P 500. The Dow was stuck in a boring 7-month trading range until this Bull market decided to spread its coattails to include more financial, health and industrial companies. While the layperson follows the Dow more than professional money managers, they may be surprised how diluted this “Industrial” average of stocks has become. Unlike the Dow Transports and Utility Averages that contain precisely what their moniker implies, the Dow Industrials, in a desire to stay relevant, has technology companies comprising over half of its value, along with a major representation of financial stocks such as credit card, banking and insurance stocks. Thus, while it has strayed from its 127-year-old Industrial working-class roots, it’s still supportive of optimistic investors labeling this a new Bull market. Increasingly, both small cap and large cap stocks, not named Nvidia or relying upon Artificial Intelligence (AI), are belatedly joining the rally. The Dow’s 10 day winning streak in the stock market coincides with overbought readings short term, but it’s also typical of a market that will continue to higher highs later this year after any normal Bull market correction of 10% or less. In fact, when the S&P has had 5 straight months of gains, it continues to rack up more new highs about 80% of the time one and 6 months later over the past 70 years.

Even the beleaguered manufacturing companies that have experienced months of surveys indicating contraction are now showing future expansion expectations. Our private ownership in this space continues to experience record backlogs, healthy order flow and a shortage of workers needed to keep up with demand. Thus, we are not surprised to see some green shoots here in a sector that was never hit hard by thew Fed’s credit tightening, at least so far.

Manufacturing is following the pattern of the overly maligned housing industry that is booming despite this being the least affordable time to buy a home in modern history. Normally it requires less than 30% of disposable income for middle class families to buy middle class homes, while for the past 18 months it has required over 40% of income. Yet the inventory of homes on the market remains historically low due to an increasing reliance upon new homes compared to the shrinking supply of existing residences. Multiple overbids for homes are also staying far above normal, indicative of pent-up demand which is supportive of housing stocks reaching record highs this year. Recessions require excess supply over demand. No sign of Recession here!

One final piece of good news for Bulls recently is the upside breakout in riskier regional banking stocks that many feared would fail due to debt duration risk as the spread between short-term and long-term rates continue to widen. Two of the three largest banks in history failed in March, but the Fed ring fenced the liquidity fears and now the worrisome 2nd tier banking stocks are breaking upwards from a head and shoulders basing pattern. This indicates that investors are less concerned with transferring their accounts to the handful of mega capitalized banks, which is boosting sentiment in the lagging financial sector.

Investors and money managers are finally allocating more of their savings toward both 5%+ money market accounts and stocks, yet surveys increasingly show a reluctance to invest more at these elevated stock market valuations until there is a notable correction. As in 2017 when stock market volatility was extremely low, pent-up demand to Buy stocks after small corrections grows as stock prices move higher without a pullback. At some point, as in January 2018, there will be a news event that will trigger a large overdue correction, but for now, dip buyers are not waiting for the traditional 5 to 10% pullback. The good news is that market leaders in mega tech have stalled while the Bull market rally is finally spreading leadership to the more unloved sectors of small cap, healthcare and financial.





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