- Dow Jones is surging again after recording a 200-point gain last week.
- China pulling import tariffs show its dependence on U.S. goods.
- With impeachment having no impact on markets, there are too many strong fundamentals to stop Dow Jones rally.
Despite threats such as the impeachment and the over-valuation of U.S.-China deal, the Dow Jones Industrial Average (DJIA) is maintaining its strong momentum. And in the short-term, it will be further boosted by China’s drop of tariffs.
Based on Dow Futures, the Dow Jones is expected to open with a gain of around 45 points. It comes after a strong week during which it added more than 200 points to achieve a record high.
#1: Dow boosts after China drops import tariffs
Much of the hype around the phase one deal between the U.S. and China was clearly exaggerated in the first few days of public reception. To the extent in which the deal would improve business sentiment in the U.S. was overplayed as pointed by high profile economists.
However, China’s drop of import tariffs on December 23 indicates that the second largest economy is in real need of American products that include frozen pork, pharmaceuticals, paper products and some high-tech components.
After the announcement of the phase one deal, insiders said that some Chinese netizens reacted negatively to the U.S.-China deal regardless of the surge of the Dow Jones and SSE Composite. Some thought that China caved to the requests of the U.S.
As such, the U.S. and China were putting in significant efforts to play it out as a win-win scenario for both countries as that would benefit President Donald Trump and President Xi Jinping equally.
The unilateral retraction of tariffs by China shows its dependence on certain U.S. products that gives the U.S. a bargaining chip in future talks. The brightening sentiment around trade talks directly affected the Dow Jones on the day and it will continue to do so in the short-term.
#2: Majority do not think impeachment will not happen
The way the House voting on impeachment was carried out has unified the Republican party in recent weeks than ever before under the leadership of President Trump.
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With a Republican majority Senate, the impeachment is highly unlikely to go through. Republican Senators like Lindsey Graham also warned that the Senate does not intend to carry out the trial in the way the House likes.
The Dow Jones and the rest of the U.S. equity market are clearly not pricing in impeachment and are not considering the possibility of President Trump leaving office before the 2020 election.
#3: No rate changes until 2021
The fundamental basis of the Dow Jones rally throughout the last quarter of 2019 has been loose financial conditions created by low Federal Reserve rates and large liquidity injections.
Even though the narrative around the Dow Jones revolved around the trade talks, the foundational factor has consistently been low rates improving the productivity of businesses.
If the rate remains unchanged throughout 2020 in spite of the record high Dow Jones, record low unemployment, rate expansion of the U.S. economy in the latter half of 2019, and a breakthrough in trade, it will serve as a bullish driving factor of the stock market at the start of next year.
This article was edited by Samburaj Das.