views
What is City Talk? Info Info. Latest

Are the Dow Jones and the FTSE 100 running too hot?

Most analysts believe the rally is underpinned by these seemingly strong US economic fundamentals

Face it, you’ve already asked yourself this question in the past week. What’s driving Wall Street and is it accelerating at a pace that you should now be worried about?


The answer is unfortunately not very clear. On the face of it, yes, any rally that sees the Dow Jones add just shy of 800 points in a little over a week should scare you, even if only a little bit.

Let’s not forget the Dow added 1000 points in 35 days between the end of November and the beginning of January.

The timeframe for the next 1000-point rally could be 5 times shorter than that – just seven days. That’s right, seven.

Ultimately, it doesn’t really matter whether the Dow breaks 26,000 on Tuesday, Wednesday or Friday of this week as seems quite likely. When it does it will be record breaking, again.


Much the same can be said of the FTSE 100. Given the collapse of Carillion on Monday one might have expected the FTSE to take a knock, or even be blown off course, from its own record-breaking run.

Nothing of the sort. By lunchtime on Monday the FTSE was 7,772, a mere 6 points below its closing high on Friday. So, depending on your point of view, Britain is either benefitting from a US economic boom and stock market rally, or we are foolishly following our American cousins down the rabbit hole.

No-one wants to talk down a genuine stock market rally. And the fundamentals of the US economy, in particular, do suggest it is experiencing a strong run.

Core Consumer Price Inflation in 2017 was 1.8 per cent, which is only 0.2 per cent off the US Federal Reserve’s target, the economy is likely to have seen its fastest growth for at least two years, and perhaps many more, while the unemployment rate is just 4.1 per cent.

Most analysts believe the rally is underpinned by these seemingly strong US economic fundamentals. If that’s true we all stand to benefit: after all, just as when the US sneezes Europe catches a cold, so the reverse is true.

So everything is fine, right? Maybe. No-one is suggesting everything is terrible. But only a madman would look at a stock market accelerating in this way and not feel at least a tinge of fear. And there is, ultimately, a danger that the rally accelerates so fast that it decouples from the economic fundamentals that appear, thus far, to be supporting it.

The hope is that the US economy is simply picking up a head of steam, as most of us have had a belly full of austerity. But there is a danger that the markets are getting carried away.

Given the long shadow cast by the financial crisis and the many false starts the US and global economy have experienced in its wake, the markets could do worse than to dab the brakes, if only gently.

To find out how INFINOX Capital can help you reach your financial goals, visit www.infinox.com.

Related articles