The Dow Jones Industrial Average, the second oldest stock market index in the world, endured a nasty three day pullback Friday. After a long string of positive days, it dropped under the 45,500 threshold. This index includes the 30 most traded stocks within the United States. Today it is again sitting around its all-time lows, above 45,760. Market pundits and market analysts alike are blaming the drop on this week’s inflation metrics. In particular, the increase in the U.S. Personal Consumption Expenditures (PCE) price index is alarming investors.
Even with such a historic decline, the Dow’s recent short-term increases are likely due to a combination of macroeconomic factors and psychological aspects of investor behavior. Even with this, the latest PCE data has core inflation shooting back up to 2.9% y/y as of July. This increase has negated five months of gains in reducing inflation. This unusual circumstance has caused a lot of people to wonder how long the Dow can possibly keep going up.
Dow Jones Industrial Average Overview
Except perhaps the Dow Jones Industrial Average, which for decades has been hailed as the pre-eminent barometer for the health of the U.S. economy. It follows the stock market performance of 30 large industrialists and provides some perspective on broader economic forces. Critics go on to regularly claim that this index is inadequate in capturing the market. It represents such a small fraction of companies.
Its unique structure allows institutional investors to arbitrage it down to a single security via exchange-traded funds (ETFs). This method makes these investment techniques even more easy for Canadians looking to get exposure to these large firms without owning the specific stocks. The average is one of the most important barometers of investor sentiment. It’s an indicator of economic conditions seen through the broad changes in fortunes of its individual member firms.
Impact of Inflation Data
It’s no coincidence that Friday’s rout in the Dow Jones was intimately tied to the release of the most recent U.S. PCE inflation data. The politically-sensitive core PCE inflation metric hit 2.9% for July, in-line with expectations but spooking markets by signaling that inflationary pressures are proving to be more persistent. This figure marks the largest jump since March and indicates a possible step backwards in attempts to cool off inflationary prices.
As investors continued to digest this unexpected news, they started to rethink their place in the market. That’s because the collective fortunes of the businesses in the Dow have a major impact on investor confidence. Quarterly earnings reports present a unique opportunity to gain insight into corporate profitability and growth trajectories. These seismic shifts can immediately change stock valuations overnight.
Market Reactions and Future Outlook
Market participants have been particularly attuned to new signs of inflationary pressure. They remain particularly hopeful for interest rate reductions in September that would drastically affect the Dow’s performance. They hope these sorts of tweaks might do something to alleviate at least some of the economic pain that Americans are feeling from inflated prices.
As evidenced by Friday’s trading session, which saw a spike in stock prices, markets are still on edge with any macroeconomic data points like the PCE price index. The Dow has intraday support around the 45,500-plex, which would shore up further downside potential. It will be important for investors to watch inflation measures very closely to continue to build investor confidence.