E DJIA Poised For Run To 30,000 In Second Half 2018

Summary

Q4 2017 headline earnings were hit badly by U.S.tax changes. The declines started to reverse with the reporting of Q1 2018 results. This should continue with Q2 earnings being reported this month.

Higher earnings should give great support to the belief that the aggregate DJIA dividend is secure and new records should be achieved as 2018 progresses.

Couple secure and higher dividends with downward pressure on the yield of the 30-year T bond, and the DJIA should strengthen. A DJIA price of 30,000 is still seen.

Many Observations Made as QE Drew to a Close in 2014 Still Valid

The post-Lehman quantitative easing ended in August 2014 with the US monetary base peaking at $4.075 trillion. In May of that year, I published an article that looked at the huge excess of commercial bank reserves that had built up at the Fed. The US monetary base had grown 5 fold in 5 years from $0.8 trillion in 2008 to $4 trillion.

The commercial banks had built up surplus reserves of $2.6 trillion. While this had never happened before, it was thought to be too early to conclude that “This time it is different”. It was just taking a lot longer than previously for the money created by the Fed to pass through into the economy.

At the time it appeared there that there was a chronic lack of demand for all the newly created money and that in turn would mean lower than anticipated economic growth, inflation, and interest rates as well as much higher equity prices which could all be with us for a good number of years.

In May 2014 it was postulated that the conditions should result in:

  • Weaker GDP growth than might have been expected from the monetary stimulus
  • Steady inflation, which since then has risen by an average of 1.44% per annum.
  • Inflation would be helped by a lower oil price which averaged US$106 vs $76 today
  • Steady 30 year T Bond rates which averaged 3.39% in May 2014 and is at 2.96%
  • A steady gold price which averaged US$1,288 per oz. vs. US$1,254 today.
  • Much stronger equities, the DJIA stood at 16,400 vs. 24,920 today
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