Long DJIA on Reflation and Infrastructure: Q2 Top Trading Opportunities

Long Dow Jones on Reflation Trade and Potential Infrastructure Spending

The United States economy has enjoyed a remarkable recovery a year after the onset of the coronavirus, leading to hot growth forecasts and huge corporate earnings expectations for companies that struggled during the pandemic. Despite lofty economic measurements, the Federal Reserve has reiterated adherence to its current policy path time and time again. Consequently, the broader fundamental backdrop for US equities is encouraging.

Heightened expectations and loose monetary policy have helped propel inflation concerns and US Treasury yields have ticked higher as a result. The combination has given rise to weakness in the stocks that worked to drag the indices out of their pandemic depths - namely large technology companies. As investors shy away from big technology names and turn to value stocks, the Dow Jones may continue to outpace the Nasdaq 100 as it did in the back half of the first quarter. Further still, potential infrastructure spending under the Biden administration could fuel another leg higher for the industrial-leaning (relative to the Nasdaq) stocks of the Dow.

It can be argued, however, that the Dow Jones, Nasdaq 100 and S&P 500 are collectively overvalued. Many investors warn the loose monetary policy of the Federal Reserve has led to inflated asset valuations or dangerous financial bubbles. While concern may be warranted, many of the conditions have been present for months so predicting a sudden bear market while the Dow is within striking distance of record highs is rather presumptuous in my opinion.

Regardless, the Dow Jones might be set to outperform either way. Should bullishness continue and US equities drive deeper into record territory, a sustained reflation trade could place the Dow in a league of its own. On the other hand, if US equities encounter broader resistance and meaningful risk aversion takes root, valuation metrics in the Dow Jones are far more reasonable than that of the Nasdaq or even S&P 500 so losses might be more measured.

Dow Jones Price Chart: Weekly Time Frame (January 2018 – March 2021)

Chart prepared by Peter Hanks, created with IG

The technical landscape also offers an encouraging look at the Industrial Average as the index remains above the March uptrend and the ascending trendline from January 2018. Together, the two technical levels will look to keep the Dow Jones afloat and stem losses should they arise.