- The Dow Jones found new all-time highs on Friday before trimming gains.
- US consumer sentiment took an unexpected hit in August.
- Consumers are beginning to sour on economic outcomes as tariff effects begin to crop up.
The Dow Jones Industrial Average (DJIA) surged to record highs early on Friday, touching chart territory north of 45,250 for the first time ever. However, tepid consumer sentiment data and a looming meeting between United States (US) President Donald Trump and Russian President Vladimir Putin are weighing on investor sentiment to wrap up the trading week.
The Dow Jones has tapped in a new all-time high of 45,277 but remains caught in congestion near the 45,000 major handle while rounding the corner into the closing bell. Fundamentals have driven most of the meaningful near-term price action as the Dow continues to drift higher following a technical bounce from the 50-day Exponential Moving Average (EMA) after chalking in the last swing low near 43,330. The 50-day EMA is now providing a technical floor near 43,885, ready to catch any short-term downturns.
US data hints at sustained tariff fallout
US Retail Sales for July came in broadly as expected, rising 0.5% MoM while June’s figure saw an upside revision to 0.9% MoM. While up is generally considered good, US Retail Sales data is nominal, meaning the economic indicator does not differentiate whether an extra dollar spent at the checkout is due to increased spending capacity or higher prices resulting from trade taxes.
The US Import Price Index rose 0.4% MoM in July, well above the flat 0.0% forecast and the previous month’s -0.1%. A rising Import Price Index implies that US importers are struggling to offset tariff costs with price discounting from exporters, a move that one would expect to occur if the US’s economic domination was forcing foreign businesses to absorb tariff costs. For that to hold true, importing costs would not only have to be falling, but they would also have to be falling globally and at a faster rate in the US than anywhere else. This overwhelmingly appears not to be happening.
August’s University of Michigan (UoM) Consumer Sentiment Index fell to 58.6. Median market forecasts expected a further improvement to 62.0, but consumer concerns over employment opportunities and future income constraints from rising prices proved calculator-wielding investors wrong. The current economic conditions segment of the UoM’s survey deteriorated to 60.8, with future expectations tumbling to 57.2.
12-month consumer inflation expectations also rose to 4.9% compared to 4.5% just a month ago, and the 5-year inflation outlook also accelerated to 4.9% from 4.5%. While consumer forecasts tend to undershoot the bad times and overestimate the good, consumers are feeling the bite from unexpected (for them) increases in the cost of big-ticket durable goods as trade taxes and import tariffs begin to leak through complex supply chains.
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Dow Jones FAQs
The Dow Jones Industrial Average, one of the oldest stock market indices in the world, is compiled of the 30 most traded stocks in the US. The index is price-weighted rather than weighted by capitalization. It is calculated by summing the prices of the constituent stocks and dividing them by a factor, currently 0.152. The index was founded by Charles Dow, who also founded the Wall Street Journal. In later years it has been criticized for not being broadly representative enough because it only tracks 30 conglomerates, unlike broader indices such as the S&P 500.
Many different factors drive the Dow Jones Industrial Average (DJIA). The aggregate performance of the component companies revealed in quarterly company earnings reports is the main one. US and global macroeconomic data also contributes as it impacts on investor sentiment. The level of interest rates, set by the Federal Reserve (Fed), also influences the DJIA as it affects the cost of credit, on which many corporations are heavily reliant. Therefore, inflation can be a major driver as well as other metrics which impact the Fed decisions.
Dow Theory is a method for identifying the primary trend of the stock market developed by Charles Dow. A key step is to compare the direction of the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) and only follow trends where both are moving in the same direction. Volume is a confirmatory criteria. The theory uses elements of peak and trough analysis. Dow’s theory posits three trend phases: accumulation, when smart money starts buying or selling; public participation, when the wider public joins in; and distribution, when the smart money exits.
There are a number of ways to trade the DJIA. One is to use ETFs which allow investors to trade the DJIA as a single security, rather than having to buy shares in all 30 constituent companies. A leading example is the SPDR Dow Jones Industrial Average ETF (DIA). DJIA futures contracts enable traders to speculate on the future value of the index and Options provide the right, but not the obligation, to buy or sell the index at a predetermined price in the future. Mutual funds enable investors to buy a share of a diversified portfolio of DJIA stocks thus providing exposure to the overall index.