Dow Rallies: More Upside For ETFs?

The Dow Jones Industrial Average logged its largest gain on Nov 28 since early September, courtesy of rising optimism on tax reform (or cuts). The index gained 1.1% on Tuesday.

The gauge now sits at above 23,830. This year has been extremely favorable for the index, with it crossing 20,000 in late January. Since then, Dow has been rising by 1000 at regular intervals.

While Trump trade has been driving the index, the latest rally was buoyed by several other factors. Let’s delve a little deeper:

17-Year High Consumer Confidence

U.S. consumer confidence jumped to a 17-year high in November, signaling upbeat sentiments surrounding the economy and labor market, per Bloomberg. The rise in consumer confidence will likely result in higher activity, consumption and spending this quarter. This should propel the market further.

Tax Reform: A Likely Reality?

Senate Republicans moved forward on Nov 28 with the tax reform agenda after leaders started convincing likely opponents by a host of “deals to resolve their concerns.” Republicans intend to speed up the timeline on tax reform and the White House intends to turn it into law by the end of the year.

At the end of September, Trump revealed his much talked-about tax plan. Some of the key suggestions are a cut in the corporate tax rate to 20% from 35% and slashing of the number of individual tax brackets to three from seven. The lowest bracket will increase from 10% to 12%, the middle bracket will be 25%, and the highest tax bracket will fall from 39.6% to 35% (read: GOP Nears Tax Reform: Buy These ETFs).

Blue Chips Should Sizzle Ahead

With the chances of a December rate hike already priced in at the current level, the treasury bond yields are likely to remain range-bound, at least till early 2018. This would help large-cap blue-chip stocks with greater international exposure. These stocks perform better in a muted-dollar environment.

In any case, most analysts are bullish on the S&P for 2018, meaning large-cap stocks of the Dow Jones should sizzle next year too. David Kostin and the equity strategy team at Goldman Sachs (NYSE:GS) expect the S&P 500 to 2,850 by the year-end. Presently, there is around 80% chance of it being cleared by early next year, as per Goldman.

BMO Capital’s Brian Belski sees the S&P surging higher to 2,950 by the end of 2018 in his base case scenario. UBS’ Keith Parker expects the S&P 500 to end 2018 at 2,900, without tax cut enactment (read: S&P 500 to Hit 2800 in 2018? Play These ETFs).

Powell Favors Deregulation

The next Fed chair Jerome Powell is an ardent supporter of deregulation in the banking sector. If this step materializes, financial stocks and ETFs like Financial Select Sector SPDR ETF (NYSE:XLF) XLF should gain ahead. Notably, the financial sector accounts for about 16.3% of SPDR Dow Jones Industrial Average (SI:SPDR) ETF (V:DIA) (read: Powell to Lead Fed: Best ETF Strategies).

Manufacturing Sector Upbeat

Manufacturing numbers point to a recovery in the United States. An uptick in manufacturing numbers can act as a strong tailwind to Dow Jones Industrial Average’s forward growth, in our opinion. After all, Dow Jones-based ETF DIA invests about 22.5% weight — the highest allocation — in the industrial sector. Notably, U.S. manufacturing activity growth was at a nine-month high in October.

ETFs in Focus

So, investors intending a momentum play, can bet on DIA, Guggenheim Dow Jones Industrial Average Dividend ETF DJD and iShares Dow Jones US ETF IYY. Investors can also settle for leveraged Dow ETF plays as long as the trend favors them. Here, ProShares Ultra Dow30 (ST:DDM) and ProShares UltraPro Dow30 UDOW are a couple of choices.

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