The Daily Prophet: Behind the Dow 20,000 Lies a Zen-Like Global Market

Robert Burgess is editor of Bloomberg Prophets.
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The Dow Jones Industrial Average finally blew past the mythical 20,000 mark, sparking hand-wringing over whether equities are too expensive with prices close to all-time highs relative to earnings.

Valuations aside, bulls can take solace in one key century-old signal that was triggered last month:   

That's when the Dow Jones Industrial Average and the Dow Jones Transportation Average both closed at records. According to the Dow Theory, simultaneous highs trigger a buy signal for equities. The transports, loaded with railroads and airlines -- and sometimes called the market's early warning system -- have outperformed industrials since the election, paced by a 49 percent jump in CSX Corp., a 28 percent gain in Alaska Air Group Inc. and a 26 percent rally in Norfolk Southern Corp.


BROAD CALM
Before the election, there was no shortage of pundits forecasting global financial turmoil if Donald Trump were to become president. That clearly hasn't happened. In fact, an almost Zen-like atmosphere has taken over even with U.S. stocks at records and bonds sending bear-market signals. An index of global financial market stress compiled by Bank of America Corp. fell this week to its lowest level since August 2015. Levels less than zero indicate less stress than normal; levels greater than zero the opposite.


CHINA DEMAND
Maybe the reason investors are so sanguine is that China is looking fairly stable after a big slowdown last year. The world's second-largest economy is notorious for fudging its data, which is why many pros look outside the nation for clues to the health of its economy. First, Japan said Tuesday that the value of its exports to China hit a record high of 1.3 trillion yen ($11.4 billion) in December. Second, iron ore has been on a tear, with prices close to their highest in more than two years amid speculation about sustained Chinese demand. The raw material surged last year as stimulus in China supported steel production.

 

PESO RALLIES?
Perhaps the biggest surprise on a day when Trump followed through on his campaign promise by signing directives setting in motion construction of a wall along the border with Mexico was that the peso was the biggest gainer in the foreign-exchange market. Data on Tuesday showed Mexico’s inflation rate jumped by the most in 18 years as gasoline prices surged and the peso slumped, pressuring policy makers to raise interest rates further. Higher rates can support a currency by attracting cash from yield-starved international investors. Mark Mobius, executive chairman of Templeton Emerging Markets Group, said at an event in Mexico City that the peso is about 20 percent undervalued.

 

SUBPAR AUCTIONS
Another day, another shaky U.S. Treasury auction. The government's monthly sale of $34 billion in five-year notes drew the weakest demand since July, based on the number of bids received relative to the amount offered. It's too soon to say that the bond vigilantes are in control, but the results come amid signs that the two people Trump has chosen to manage the federal budget appear to be at odds over how to tackle their first assignment: handling the debt limit. Treasury Secretary nominee Steven Mnuchin and the pick to head the Office of Management and Budget, Mick Mulvaney, face their first joint test in the run-up to March 16, when debt-limit suspension period expires. Failure to agree means investors in the world’s deepest debt market may grow uneasy about the potential of a U.S. default.

 

TEA LEAVES
The vacuum of U.S. economic data this week gets filled tomorrow with a flurry of reports on jobless claims, new home sales, the trade balance, wholesale inventories, leading indicators and the services sector. Also, Google parent and market bellwether Alphabet Inc. releases earnings. With 10 "buy'' ratings and one "hold," analysts and investors will be looking for improvement in operating margins and revenue growth. In its last earnings report in October, Google's revenue, excluding payments to partner sites, was $18.3 billion, versus analysts' forecasts of $18 billion.


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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Robert Burgess at bburgess@bloomberg.net