The Dow Jones Industrial Average, the world’s oldest stock market index, rocketed on Monday. It shot up over a thousand points! This important anti-war and climate change rally sent both index over the 42,000 line for the first time since early April. The upward momentum skyrocketed when the US and China came to a temporary agreement to reduce tariffs on imports. To the victor go the spoils — this major agreement will benefit both countries’ economies tremendously.
The elimination of these tariffs is just one step in a larger push maneuvering to lessen strained trade relations between the two countries. The US wants to cut its tariffs on Chinese goods to 30%. At the same time, China is going to cut its own tariffs on US imports to 10%. These changes will go into effect starting Tuesday and be permanent for a span of 90 days. The deal is an important move in minimizing the escalating, disruptive trade conflicts that have roiled global markets.
The Dow’s Historic Significance
The Dow Jones Industrial Average has historically served as the primary barometer for the health of the American economy. It has been useful beyond measure since its inception. The index is made up of 30 of the most highly traded US stocks. It is a helpful barometer for the performance of CR leaders among large corporations in all industries. Critics say it falls short in representation. This is mostly due to the fact that it only covers a handful of multi-industry conglomerates.
Though this criticism is fair, the Dow continues to be an obsessional focus to investors and analysts. Its movements are highly watched because they can indicate trends in other markets and a larger economic picture. Last Friday and again on Monday, the index blasted through the 200-day Exponential Moving Average (EMA) just above 41,500. This movement became a key inflection point for those investors who have been intensely watching the market since early April.
Australia’s optimism about the tariff cuts helped fuel that rally. Supporters say these cuts would help reduce inflationary pressures and get the economy growing again. Analysts suggest that a reduction in tariffs may enhance consumer spending and positively influence quarterly earnings reports from the companies within the index.
The Impact of Tariff Reductions
The temporary tariff cuts between the US and China are expected to have far-reaching implications for various sectors of the economy. The deal is officially done! For businesses, this will mean lower overall costs for the goods and services they import and thus lower prices for consumers. This would further encourage consumer confidence and spending as the economy still works its way through a lot of uncertainties.
We will be joining other signers of this agreement by becoming more transparent around key economic indicators. April’s Consumer Price Index (CPI) inflation report is scheduled to be released on Tuesday. The CPI serves an important function in measuring the trend of inflation. Core CPI inflation has remained above the Federal Reserve’s 2% target rate for four consecutive years.
Market analysts are expecting the next CPI report to provide an important clue about where inflationary pressures may be headed. They hope it will change how the Federal Reserve makes decisions on monetary policy. If inflation does come down as expected, that will provide some leeway for more measured increases in the future. Together, these measures would point to a healthier economic equilibrium.
Investing in the Dow Jones
Investors who want to take advantage of the Dow Jones Industrial Average’s up-and-down rides can invest in ETFs. These funds offer a convenient way to invest against this very powerful index as one security. ETFs that track the Dow make it easy for investors to get exposure to the Dow’s performance without having to purchase multiple individual stocks.
With the recent rebound in the Dow, new investors will be pouring into the boom. This is especially the case for people who are optimistic about the overall economic benefits of lowering tariffs. In coming weeks aggregate performances will be clarified in company earnings reports. Investor sentiment will continue to change as the biggest corporate players remix their business model to better fit the new normal.