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Why the Dow Could Be Record-Bound Once More

By Dan Caplinger – Sep 16, 2013 at 11:03AM

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Investors want more from the Fed, and it looks like they're going to get it.

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Early last month, the Dow Jones Industrials (^DJI 0.45%) set a new record of 15,658. Then the stock market's rally gave way to fears about rising interest rates, potential war in Syria, and the future direction of U.S. monetary policy. Yet last week, Syrian fears subsided as a diplomatic solution materialized, and the announcement over the weekend that former Treasury Secretary Larry Summers will not seek to be chairman of the Federal Reserve sent stocks soaring this morning. By 10:55 a.m. EDT, the Dow was up 164 points -- less than 1% below its all-time record high. The S&P 500 is even closer to a record, with its nearly 1% gain leaving it just half a percent below its Aug. 2 high-water mark.

Investors throughout the financial markets clearly expect a slower withdrawal of accommodative monetary policy since Summers is out of the running. Bond yields plunged more than a tenth of a percentage point, which is a huge move for the bond market. If the Fed actually delivers on what investors now expect, it could be the catalyst that sends the market to new highs.

Some of the Dow's top performers show how important investors consider current monetary-policy accommodation to be. Boeing (BA 2.01%) has soared 3%, as the company has several important initiatives moving forward, including the stretch version of its 787 Dreamliner and a potential deal to sell its F-15 fighter jets to South Korea. Many airlines are working to make their fleets newer and more fuel-efficient, and low interest rates help make it easier for them to finance their purchases. Boeing can expect to get greater numbers of purchase orders if rates give back some of their recent rise.

But monetary policy isn't the only impact the government has on the economy. UnitedHealth (UNH 1.49%) is up 1.7% as the Oct. 1 start date for Obamacare's health-insurance exchanges approaches. UnitedHealth and its peers are still evaluating how many of the new state-run exchanges they should participate in, but it's important for long-term investors not to focus solely on the company's immediate moves. If Obamacare exchanges prove to be a profitable opportunity, UnitedHealth can always jump in more forcefully in an effort to poach business away from first-mover competitors.

Finally, the stock market gains extend beyond the U.S., as foreign markets are also soaring. iShares MSCI Emerging Markets (EEM -0.47%) added another 1.4% in early trading, with many investors believing that an accommodative Fed could boost foreign investment, reversing poor performance based on fears of higher rates and tighter policy in recent months. Similarly, the iShares MSCI EAFE ETF (EFA 0.51%) has risen almost 1%, with its focus on developed international markets revealing the potential that a stronger U.S. economy could have on activity across the globe. Especially considering recessionary conditions in Europe, any boost to prospects there leaves investors with plenty of room for further gains.

Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends UnitedHealth Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$34,347.03 (0.45%) $152.97
Boeing Stock Quote
Boeing
BA
$178.36 (2.01%) $3.51
UnitedHealth Group Stock Quote
UnitedHealth Group
UNH
$537.62 (1.49%) $7.91
iShares MSCI EAFE Index Fund Stock Quote
iShares MSCI EAFE Index Fund
EFA
$66.62 (0.51%) $0.34
iShares MSCI Emerging Markets Indx Stock Quote
iShares MSCI Emerging Markets Indx
EEM
$37.77 (-0.47%) $0.18

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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