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Is the Dow Jones in Trump’s Trap?

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On Tuesday, the Dow Jones Industrial Average Index made an intraday high of 27,560.36—an all-time high for the index. The S&P 500 also closed near its all-time high. Among the Dow’s top constituents in the industrial sector, Boeing’s (BA) stock prices rose 2.1% on the same day. However, Apple’s stock prices fell 0.1% in the last trading session. Apple stock is the Dow’s top holding in the IT sector. Together, Boeing and Apple account for around 15.2% of the index.

Notably, “phase one” of the trade deal is one of the most important factors behind the move in equity indexes. Tony Dwyer of Canaccord Genuity thinks this is the beginning of another leg of the bull market. What if this turns out be a trap?

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Is the Dow Jones in a trap?

A Reuters report suggested that President Trump and President Jinping might sign a trade agreement this month. However, a new venue hasn’t been announced since the APEC summit got canceled. On Monday, President Trump tweeted, “Stock Market hits RECORD HIGH. Spend your money well!” The Trump administration thinks that “phase one” will accelerate the purchase of US agricultural products. Moreover, the deal could also boost businesses’ confidence.

In a report on Monday, FactSet estimated a possible contraction in the fourth-quarter earnings. The report said that the S&P 500’s earnings fell 2.7% in the third quarter compared to the third quarter of 2018 as of November 1. The report expects another 0.4% fall in the earnings on a year-over-year basis in the next quarter. Despite President Trump’s efforts, the contraction in the earnings could be a problem for the Dow Jones and other major US equity indexes.

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Experts see a different perspective

Mike Wilson, Morgan Stanley’s chief strategist, warned about a possible divergence between the equity market and the economy. Last quarter, the economy grew at the second-slowest rate during President Trump’s ongoing tenure. Read the US and China PMIs Diverge: What’s Really Happening? to learn more. Wilson also said that a 20% trade deal and an 80% business cycle should drive the market.

However, the current sentiments in the equity market tell a different story. An 80% trade deal and a 20% business cycle might be behind the market’s movement. Nelson had already warned about a market correction in July. In August, major US equity indexes had the second-highest monthly decline in 2019. The Dow Jones Industrial Average Index and the S&P 500 fell 1.7% and 1.8% in August.

As reported by CNBC today, former US Treasury Secretary Larry Summers expressed concerns about “phase one” of the deal. He said that the deal isn’t “economic nirvana.” He also said, “There are deeper and larger issues that are holding back rapid global expansion.”

Dow Jones’ moving averages

On Tuesday, the 20-DMA (day moving average) at 26,872.83 is an important support zone for the Dow Jones. On the same day, the index was 2.7%, 3%, and 4.8% above its 50, 100, and 200-DMAs, respectively. The index above these key moving averages indicates rising bullish sentiments.

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