Why We Should Be Cautious Despite Dow and S&P 500 Hitting Record Levels

The Federal Reserve has brought back investor confidence in the economy. As the technology sector recovered, the Dow and S&P 500 rose on Monday, reaching record highs. The Dow Jones Industrial Average rose by 0.68 percent or 144.71 points. It reached 21,528.99, cheering investors all over. The NASDAQ Composite also rose by 1.42 percent or 87.26 points to reach 6,239.01. The S&P 500 also rose by 0.83 percent or 20.31 points to close at 2,453.46.

Dow and S&P 500

The S&P healthcare index has also closed on a record high. On the other hand, NASDAQ’s biotech index gained 2.5 percent, its biggest one day rise since February. S&P financial sector rose and posted a strong gain after Fed reassurance that inflation is under control. The S&P technology sector showed a 1.7 percent uptick after declining for the past two weeks.

What Caused the Dow and S&P 500 Rise?

 

The technology sector was experiencing cautious moves by the investors for some time. However, Amazon’s acquisition of Whole Foods cheered the investors and led to increased activity. Amazon announced the move on Friday which led to a considerable impact on the markets on Monday.

The Federal Reserve also helped boost investor confidence in the economic health of the domestic markets. After a rate hike late week, the Feds reassured that the economy is in decent shape. It can also be seen with the 10-year bond yields which have started to tank recently.

William Dudley, President of New York Federal Reserve said that inflation in the US is going down. It could run parallel to the improving labor market, helping the economy get in better health. This should continue alongside a tightening fed policy and rising interest rates.

Caution Ahead

 

Problems with overvaluation in the Dow and S&P 500  led technology stocks drop earlier in the month. However, the top large cap stocks rose on Monday. Alphabet Inc, Amazon, Apple, and Netflix posted gains. Amazon went to an all-time high right when the markets opened. The sector had been moving down for two straight weeks, even though it is the best performing sector of the year by far.

Vice President of trading and derivatives at Charles Schwab, Randy Frederick, was not convinced with the gains. He said, “I don’t know where the optimism is coming from. That’s not to say we should be negative. I just don’t see any reason for excessive optimism or pessimism right now.”

The problems with valuation may come back as soon as the effects of Amazon acquisition and Fed comments are over later this week. It would be wise to act cautiously.