Lower inflation, better GDP spurs Dow Jones advance

The Dow Jones Industrial Average has risen 1.17% so far this week.
DJIA futures advanced 0.5% in Friday’s premarket.
Walgreens Boots Alliance tanked 9% on earnings.
34,600 remains the primary target for bulls to break.
US Q1 GDP was reassessed higher to 2% annualized on Thursday.

The Dow Jones Industrial Average (DJIA) rebounded this week following last week’s downtrend. Lots of positive economic data arose this week, and on Thursday US Q1 GDP was reassessed from 1.3% to 2%. This surprise has cemented the view on Wall Street that a “soft landing” is truly a reality.

On Friday, the DJIA rose 0.8% after the open, matching Thursday for the best result all week. The S&P 500 is even better, up 1.1%, and the NASDAQ has so far returend 1.5%.

Dow Jones news: Q1 economy lifted from 1.3% to 2%

In the second half of 2022, the US economy moved from 3.2% annualized growth in Q3 to 2.9% in Q4. This was seen at the time as a sign that the Federal Reserve’s interest rate hikes were beginning to work as intended. When the Bureau of Economic Analysis (BEA) released their preliminary GDP figure for Q1 earlier this year of 1.3%, the sudden drop was taken as more evidence that a recession was imminent.

Then on Thursday, the BEA revised the Q1 figure all the way up to 2%. Now suddenly the worries seem misplaced. The better economic reading also appears to align with the decent jobs number that have appeared in recent months.

Early this week the Conference Board’s Consumer Confidence Index release beat expectations. June’s reading was in fact the highest level reported in 18 months. US New Home Sales also beat expectations of a decline. Additionally, France, Spain and Italy all reported quite positive reductions in headline inflation this week, demonstrating that more stable prices are once again becoming the norm among OECD countries.

For the Dow Jones, this is more good news. The quicker that inflation falls while economic growth remains on a clear growth path, the quicker that the Fed reduces interest rates. Powell made the rounds on Capitol Hill last week, reiterating his expectation of two more rate hikes in the second half of the year. More data that confirms a soft landing, however, will continue to give investors the idea that they have already seen the terminal rate.

Walgreens Boots Alliance continues long-term destruction with quarterly results

Dow index stock Walgreens Boots Alliance (WBA) reported earnings on Tuesday, July 27, that just continued the saga of a failing colossus. Walgreens stock plunged more than 9% to its lowest price level since September 2010 after cutting full-year earnings guidance by more than 10%.

Revenue in the quarter arrived ahead of consensus, but a 7-cent miss on earnings per share left investors with more evidence that Walgreens has lost its competitive edge. The drugstore chain announced the closure of 150 locations in the US and another 300 in the UK. The company began closing stores in 2015 to cut costs, but the closures have spiraled into a 9-year theme.

Now many analysts think Walgreens will soon be cut from the Dow Jones index and thus lose a large portion of its shareholders, who own it via index funds and ETFs. Deutsche Bank downgraded Walgreens after earnings, cutting its price target from $46 to $34.

Dow Jones FAQs

What is the Dow Jones?

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.

What factors impact the Dow Jones Industrial Average?

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.

What is Dow Theory?

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.

How can I trade the DJIA?

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.

What they said about the Dow Jones - Kristina Hooper

Kristina Hooper, Global Market Strategist at Invesco, predicted this week that the US economy will sidestep a full-blow recession. Growth may remain uneven but should pick up in 2024, Hooper said.

“We continue to believe the US is likely to avoid a substantial broad-based recession. Instead, we expect some weakness in the second half of this year as policymakers accomplish a bumpy landing, but we anticipate activity will nevertheless remain relatively resilient.”

Dow Jones forecast

The Dow Jones index has moved back to the 34,200 to 34,600 resistance zone. This region has pushed prices lower at least seven times in the past seven months. Bulls need to break and close above 34,600 on the weekly chart in order to spur a true rally. A close above would likely make the 35,500 level the next bull target

The 32,600 to 32,800 range remains the area of support for now. The 9-day Simple Moving Average (SMA) looked as if it was ready to break below the 21-day SMA last week, but now the rally seems back again. Breaking through 34,600 is really all that matters. A break and close above will be greeted with a rush into the index, while a failure will automatically lead to a sell-off.

DJIA daily chart

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