The Dow Jones Industrial Index (or DJIA) is trading just 2.2% below its all-time high. But is the Dow Jones ETF (DIA) trading at a premium despite several macro-economic concerns? The Dow Jones Index is up 14.8% year-to-date and has gained over 50% in the last five years.
In 2019, tech stocks like Apple (AAPL) and Microsoft (MSFT) have driven the index higher. While Apple has gained 50%, MSFT is up 35% this year. The other top performers include Visa Inc. (V) and Home Depot (HD) that have returned 33% and 38.5%, respectively, in 2019.
But is the stock bubble about to burst? The markets have been in a bull run since 2009 and several analysts and economists predict a recession in 2020. Several economic indicators support them, too.
Several economies are in a contraction
Earlier this month, investors panicked after ISM released the PMI data for the US. ISM estimated the manufacturing PMI at 47.8% in September, down from 49.1% in August. A PMI score of below 50 points to a contraction. The PMI was the lowest since June 2009 and fell for the second consecutive quarter. Also, the US retail data isn’t encouraging.
Comparatively, Europe’s manufacturing PMI data for September fell to 45.7% from 47% in August. It was the lowest since October 2012. Europe’s job cuts have now continued for five consecutive months. Though China’s manufacturing PMI data of 49.8% for September beat expectations, it was still below the 50% mark.
The US-China trade war makes things worse
This slowdown in major global economies has been mostly attributed to the US-China trade war. Though trade talks have resumed recently, it is far from over and might keep markets volatile as we head into 2020.
On Friday, the US government imposed tariffs on $7.5 billion worth of European goods, such as cheese and whiskey. The tariffs on aircraft stand at 10% while it is 25% for the above-mentioned goods, according to this Market Watch report.
The report states, “These new U.S. tariffs on EU spirits and wines could result in the loss of 8,000 good-paying jobs across the U.S. beverage alcohol sector, from importers, distributors, wholesalers, to the hospitality sector.”
China’s slowing growth might drive Dow Jones lower
We have seen that China’s manufacturing PMI for the last month was below 50. Further, the country’s GDP in the September quarter grew by 6%, which was the slowest growth since the March quarter of 1992.
Analysts had pegged China’s Q3 GDP growth at 6.1%. According to this CNBC report, economist Julian Evans-Pritchard stated, “Despite a stronger September, pressure on economic activity should intensify in the coming months. Cooling global demand will continue to weigh on exports, fiscal constraints mean that infrastructure spending will wane in the near-term and the recent boom in property construction looks set to unwind.”
In case the downturn intensifies, several tech stocks in the US will trade lower. Semiconductor and consumer tech companies including Apple have significant exposure to China.
An economic downturn is likely
The above data presents a grim economic scenario. Further, investors also need to factor the repercussions of the yield curve, which inverted at the end of August. An inverted yield curve has preceded a recession by 12 to 24 months for the last 50 years and has investors worried.
The technology spending declined in the last quarter and has impacted stocks, such as NetApp and DXC Corp. High growth stocks like Roku, Alteryx, Twilio, Okta, Splunk, The Trade Desk, and many others are trading way below their 52-week highs. Investors are getting increasingly pessimistic about stock valuations and the sell-off can extend to other sectors, too.
The federal reserve might cut interest rates again to stimulate growth. This might give a temporary boost to the Dow Jones Index, as will a strong earnings season. In case the trade war comes to an end, investors can expect the S&P 500 and Dow Jones to touch record highs.
What’s next for the Dow Jones and investors?
But this uptick might very well be the economic peak for US investors. The earnings season bought some sheer for investors. Dow Jones picked up momentum after United Health’s (UNH) stellar results drove the stock higher by 8% in a single day. This managed to reverse early losses for the Dow Jones Index.
However, on October 18, Boeing (BA) and Johnson & Johnson (JNJ) drove the Dow Jones lower by 250 points due to several allegations against them. Will the DJIA open in red on Monday as an outrage against Boeing? Will JNJ turn the investor segment negative? There is a strong chance for everything to go all downhill from here.