Dow on Cusp of Breaking 20,000

Market Trends - 25/01/2017

With the S&P 500 and Nasdaq Composite breaking through to new highs on Tuesday, all eyes are on the Dow Jones Industrial Average as it attempts to clear the 20,000 hurdle that has remained a challenge for weeks.  The main catalyst for this latest drive higher in US equities was the $1 trillion infrastructure initiative proposed by Senate Democrats on Tuesday.

The idea is to spend this amount over the span of 10 years in an effort to repair dilapidated roads and bridges, while working to build national transportation networks, echoing campaign pledges by US President Donald Trump.  Although the idea was pitched to Trump on Monday, it is unclear whether he will be willing to embark on the ambitious programs considering it is likely to upset fiscal conservatives within the Republican party.

Considering the Democrats have failed to address how this project will be paid for, any move to push the project may encounter resistance in both the House and Senate where the Republicans retain a majority.

Nevertheless, the reaction in financial markets to the development was notable, pushing equities higher across the board.  Generally speaking, greater fiscal expenditure is viewed as roundly positive for stocks and American companies poised to reap the rewards of increased government spending.  Furthermore, these types of projects are typically inflation-friendly, helping to support the Federal Reserve’s efforts to normalize monetary policy over the coming years.

With inflation already topping the 2.00% desired by officials, any agreement that stretches across the partisan aisle in Washington is likely to be well received by Wall Street.  The move by the Democrats comes on the heels of a busy week for Trump, who has been occupied with executive orders including approval of the contentious Dakota Access Pipeline and Keystone XL Pipeline projects.

However, any further gains in the Dow to bring it to the key 20,000 psychological level will likely be the function of additional pressure on the US dollar which has a traditionally inverse relationship to stock valuations.


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