In early August, Dow Theory for the 21st Century, a technical indicator we track on US equity markets with an excellent track record dating back to 1950, gave a ‘Buy’ signal. We published a detailed study on Dow Theory for the 21st Century in October 2020 which is available in the members’ area of our website.
The latest ‘Buy’ signal was triggered by a strong recovery in markets from the June lows, likely because of investors’ belief that inflation has peaked and will begin a reversal and a likely related economic slowdown would be met with interest rates cuts by the Federal Reserve in 2023. Lower interest rates, in turn, are good for asset prices and investors reacted positively through late-June and July to this line of thinking.
In our view, however, a number of our own observations would call in to question this latest ‘Buy’ signal. Inflation is as likely to stay in mid-single-digit figures as not, meaning interest rates of 3% will be nowhere near enough to compensate. Earnings in the US remain well above the long-term trend and the market remains highly valued relative to history. Add in the fact that quantitative tightening by the Federal Reserve has only just begun and one could argue that we haven’t seen the bottom of this bear market.
Comments from the Federal Reserve later in the month also tempered investors’ enthusiasm and led to a partial reversal of the recovery enjoyed since mid-June. Fed Chair, Jerome Powell, highlighted that history suggests that any early easing of monetary policy (i.e., lowering of interest rates) is unlikely to be effective when fighting inflation – leading investors to conclude that there would, in fact, be no reduction in interest rates in the US even if economic data highlights a softening in the economy.
We monitor the ‘Buy’ and ‘Sell’ signals from Dow Theory for the 21st Century for subscribers to our weekly newsletter offering. Dow Theory is not an infallible signal, but it’s record has delivered well above average returns from 1950 to 2022. Long standing subscribers to our newsletter will recall the ‘Buy’ signal on 10th March 2020. We went with that signal at the time and how right it was. If you are interested in subscribing to our weekly newsletter and website offering click this link. Alternatively, just contact us at info@gillenmarkets.com
