Will Dow Jones Proceed to Outperform Nasdaq 100 on Reflation Optimism?

DOW JONES FUNDAMENTALFORECAST: BULLISH

• Dow Jones gained 7.8% whereas the Nasdaq 100 fell 3.6% since February
• Fiscal stimulus, vaccine rollouts and powerful financial information might proceed to help shares
• The Dow Jones index is buying and selling at a 29.1 price-to-earnings (P/E) ratio, far above its 5-year common

Reflation trades have been the market theme over the previous two months, with pandemic winners – know-how, shopper staples and utilities – giving approach to cyclical names akin to supplies, vitality, industrial, monetary and shopper discretionary. This development was backed by a large US fiscal stimulus invoice, a easy rollout of Covid-19 vaccines within the US, in addition to upbeat financial information that confirmed indicators of a strong restoration from the pandemic.

The Dow Jones Industrial Common rallied 7.8% since early February whereas the Nasdaq 100 index fell 3.6% (chart beneath). This makes excellent sense within the context of a return-to-normal earnings enhance for the brick-and-mortal companies on the expense of digital companies. Nevertheless, the pandemic has profoundly modified shoppers’ habits and their day by day life routines. The adoption of work-from-home, Zoom assembly, on-line supply of meals, e-commerce, and dwell streaming has inevitably eroded demand for face-to-face events. This development might even prolong past the Covid period as folks have familiarized themselves with digital instruments and loved the comfort of utilizing them.

Dow Jones vs. Nasdaq 100 – February to March 2021

Chart created with TradingView

That mentioned, the hole between the Dow Jones and Nasdaq 100 is probably not widened too far additional earlier than an equilibrium level is reached once more. Extra importantly, a viral resurgence and a slowdown of the vaccine marketing campaign in Europe add to the uncertainty surrounding the worldwide restoration and border reopening. The latest drop in crude oil costs mirrored this concern, because the vitality demand outlook was dampened by a renewed wave of lockdowns in Germany, France and Italy.

Throughout the Atlantic, sentiment seems to be higher and financial information launched final week confirmed additional indicators of strengthening. The US economic system expanded 4.3% MoM in the course of the fourth quarter, beating an preliminary estimate of 4.1%. In the meantime, the weekly jobless claims determine got here in decreasethananticipated, with 684okay folks filling for unemployment advantagesin comparison with the 730okay forecast. The latest development confirmed steady enchancment in labor market situations, which appeared to have shrugged off February’s excessive chilly climate and a second viral wave in the course of the winter.

Trying forward, the US nonfarm payrolls report on April 2nd will likely be carefully watched for clues a couple of broader restoration within the labor market and its ramification for the Fed’s rate of interest path.

US financial institution shares had been additionally boosted by the Fed’s choice to permit lenders to boost dividends after June if they will move the subsequent stress take a look at. The act confirmed additional energy within the monetary system as policymakers change into extra assured a couple of post-Covid restoration.

Valuation-wise, the Dow Jones index is buying and selling at a 29.1 price-to-earnings (P/E) ratio, which is greater than 50% above its five-year common of 19.28. The ahead P/E ratio estimated by Bloomberg is at 21.10, as earnings are forecasted to revert again sharply within the quarters to return.

Dow Jones Index vs. P/E Ratio – 5 Years

Supply: Bloomberg, DailyFX

— Written by Margaret Yang, Strategist for DailyFX.com

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