By CCN Markets: The Dow Jones Industrial Average is set to blow past its record high and keep pushing. That’s the analysis of Christopher Harvey, head of equity strategy at Wells Fargo.
Harvey believes investors are wrongly building defensive portfolios when they should be bullish on stocks. He sees the Dow going higher on the back of interest rate cuts and strong corporate performance.
“We think the equity move is a little bit deceiving. We think people are really misconstruing it. Everyone is saying ‘oh my goodness we’ve had such a great run, it’s time to take profits.’ But really if you look at it, the market’s flat since the last Fed meeting. So what that tells us [is] a lot of the Fed dovishness, a lot of the expectation for a Fed cut really hasn’t been priced in. That’s why we think equity markets are going to go higher.”
Dow Jones close to record high
Dow Jones futures rose on Monday, putting the flagship index within touching distance of a new record high. At 5.49 am EST, DJIA futures rose 50 points (0.19 percent) to 26,747. It leaves the index just short of its 26,951.81 all-time high.
After carving out new highs last week, S&P 500 futures rose 6.75 percent (0.23 percent) in early-trading Monday, indicating another strong start at the opening bell. Nasdaq futures followed suit, rising 24 points (0.31 percent) higher.
Investors are too defensive
As CCN reported, Wall Street investors are rapidly building defensive portfolios as stock markets reach record highs. A survey by Bank of America Merrill Lynch revealed that traders are selling risky equities and stockpiling cash at the fastest rate in almost a decade.
One $222 billion wealth management firm, Pictet, is hedging for a large downturn:
“Pictet has shifted to a defensive portfolio strategy, almost doubling its cash holdings to 15 percent this year. A fund of this size typically only holds 5 percent in cash, so Pictet is obviously hedging against a pullback in equities.”
Harvey believes this portfolio rebalancing is a mistake. He says firms are “misconstruing” the current state of the market.
Catalysts for further Dow gains
The Wells Fargo analyst believes that a marriage of low-interest rates and strong corporate growth will push stocks higher. He also said investors haven’t fully priced in the looming interest rate cuts.
He’s got a point. The DJIA is flat between the April 30th Fed meeting and the June 18th meeting, despite a huge shift in sentiment from hawkish to dovish.
Traders are now anticipating a 100 percent chance of an interest rate cut in July. Harvey acknowledged that the trade war with China was still a danger, but he’s optimistic that the G20 meeting between Trump and Xi Jinping will help continue dialogue.
Path to Dow 3,000?
Harvey’s analysis echoes the sentiment from Skybridge Capital’s Troy Gayeski. As CCN reported, Gayeski sees a 25 percent chance the DJIA pushes past 30,000 by the first quarter of 2020. His analysis implies a potential 12 percent upside.
“Even though some of the headlines in the short term are negative, you can’t get too bearish based on the recent trajectory of China-US trade talks. You have to still focus on the strength of the domestic U.S. economy, which is rather robust.”
Like Harvey, he points to low interest rates, strong corporate growth, and the likelihood of investors FOMOing into the market.
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