DOW Jones Poised for Collapse

In early February, there was synchronized global growth, no trade war, political certainty, optimism generated by Trump’s tax cuts, interest rates were below 2%, and the US money supply reached a projected peak in liquidity. All of these factors converged to push the DJIA to an all time high of 26,616. 

These fortuitous economic conditions have quickly faded. Since then, quantitative tightening has taken effect, interest rates have risen alongside bond yields, there is political uncertainty surrounding Trump’s aggressive economic agenda as midterms approach, and emerging markets are showing signs of collapse. The DJIA could return to the January/February highs, but it is important to keep an eye on those levels as a key indicator of a market double top. 

Put simply: under Obama the Fed was blowing air into equity valuations by expanding the money supply and cutting rates to 0%. Now under Trump it is reversing monetary stimulus by shrinking the money supply and raising rates. Any continuation of the bull market beyond the February highs means that the market is fighting uphill against an uncooperative central bank and is likely to precipitate a similar liquidity event to the Feb 5 VIX pop. Also worth considering is that midterms are approaching. This represents a serious risk to equities if Democrats are elected and the narrative surrounding Trump’s economic agenda collapses.