The Dow Jones Industrial Average (DJIA) hit new weekly highs even though the University of Michigan’s Consumer Sentiment Index dropped to 50.8 from 52.2. Consumer inflation expectations also rose, with 1-year predictions increasing to 7.3% and 5-year predictions reaching 4.6%. Concerns about tariffs are affecting consumer outlook, raising fears of “profit-led inflation.” Recent US inflation data was better than expected, but tariff impacts remain a worry, as the Effective Tariff Rate climbed to 13% from 2.5%. The tariff rate on China alone exceeds 30%.

Market Response to Policy Changes

The Trump administration frequently proposes bold policy changes that are often reversed later. A recent budget bill was rejected in Congress, affecting spending plans and likely sparking criticism from President Trump. The DJIA has bounced back to 42,500 after dipping to 36,600, thanks to easing trade concerns. Overall, bullish market trends pushed the DJIA above the 200-day Exponential Moving Average of 41,500, with a gain of 16.25%. The DJIA, which includes 30 major US stocks, is affected by macroeconomic data, interest rates, and inflation. According to Dow Theory, both the DJIA and the Dow Jones Transportation Average should be analyzed together to understand market trends. Despite a significant drop in consumer sentiment, which now sits at a low 50.8, the DJIA continues to climb to new weekly highs. This contradiction can be explained by market behavior; sometimes, positive shifts in broader economic indicators or central bank policies can outweigh consumer pessimism. Inflation expectations are rising again, with 1-year predictions at 7.3% and 5-year predictions at 4.6%. These increases shouldn’t be overlooked. Pricing pressures are rising higher than what policymakers might be comfortable with. Recent inflation data was surprisingly low, which helped support stock prices, but it’s essential to view this in context. Costs from tariffs are starting to have a more significant impact on company profits. The Effective Tariff Rate is now at 13%, a fivefold increase from 2.5%. Tariffs related to China exceed 30%, adding strain to corporate expenses. While short-term data shows resilience, ongoing cost pressures can impact profits over time.

Impact of Dow Theory on Market Trends

Policy unpredictability has returned to the discussion. Historical patterns indicate that bold policy announcements often get revised or retracted, as seen with the recent rejection of a budget proposal in Congress. The implications of these actions on fiscal spending are crucial, especially with inflation pressures still present. Without clarity on fiscal policy, corporate earnings projections become uncertain. On a technical note, the DJIA has successfully surpassed the 200-day Exponential Moving Average of 41,500. This average serves as a key indicator of market sentiment, and staying above it generally suggests that investors are willing to take risks in equities. The DJIA’s rise from 36,600 to 42,500 represents a 16.25% gain—not necessarily an ideal entry point for quick trades but still promising. The Dow Jones is comprised of 30 large-cap US companies and operates as a price-weighted index. This means that higher-priced stocks can influence it more significantly than lower-priced ones. Therefore, it reacts not only to economic data but also to interpretations of interest rates and inflation expectations. According to Dow Theory, strength in the industrial index should be confirmed by movements in the transport index. Discrepancies between the two can signal potential issues, particularly when demand slows. If the transport index fails to keep up with the industrial index, it may indicate trouble ahead. We need to pay attention to how rates respond to unpredictable fiscal actions and whether increased tariff pressure leads to higher producer-level inflation. For now, fluctuations in rate expectations are the more critical factor to watch, even if the overall market suggests a recovering appetite for risk. Create your live VT Markets account and start trading now.

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