A century indicator sounds the alarm! If the US stock market continues to decline, will Trump and Powell step in to rescue the market?
The Dow Jones Transportation Average has fallen 19% from its peak in November last year, and the Dow Jones Industrial Average has also dropped 9.3% from its high. According to Dow Theory, the weakness in these two major indices indicates that the market has entered a bear market. Bank of America’s Hartnett believes that the sharp decline in U.S. stocks may trigger intervention
A century-old market indicator—the Dow Theory—is sounding alarms for the U.S. stock market, signaling that investors will face more pain. Will Trump and Powell step in to save the market?
As of the close of U.S. stocks on Thursday, the barometer measuring consumer and industrial demand—the Dow Jones Transportation Average, composed of 20 stocks—has fallen 19% from its peak last November, nearing what is known as a bear market territory. The index is set to record its worst week since September 2022.
Alongside the Dow Jones Transportation Average, the Dow Jones Industrial Average has also significantly declined, dropping 9.3% since reaching an all-time high last December. The "Dow Theory" suggests that simultaneous weakness in both the Dow Jones Transportation and Industrial indices typically indicates that the market has entered a bear market trend.
For technical strategists, the decline in these two indices signals that it is time to sell. Todd Sohn, Managing Director of ETF and Technical Strategy at Strategas Securities, stated:
As a check on risk barometers, this is not a good backdrop for the overall market. The weakness in these two Dow Jones indices highlights that bearish signals are rapidly emerging from different corners of the market, particularly with sharp declines in builders, chip manufacturers, and the industrial sector.
The slump in the transportation index is not an isolated event; over the past week, several airlines and retailers have issued cautious outlooks and mentioned weak demand. Delta Air Lines cut its profit expectations by half, and American Airlines Group indicated that its first-quarter losses would be about twice what was previously expected. Sales forecasts from Dick's Sporting Goods and Kohl's were also well below expectations.
Will the stock market crash trigger intervention?
In recent days, the U.S. stock market has been shrouded in gloom, with increasing concerns about a recession in the U.S. economy and the risks posed by the Trump administration's aggressive stance on tariffs.
Bank of America analyst Michael Hartnett stated that a sharp decline in the U.S. stock market could prompt Trump and the Federal Reserve to take policy intervention. Hartnett said:
We view this as an adjustment, not a bear market for U.S. stocks. Since a stock bear market threatens a recession, further declines in stock prices will trigger shifts in trade and monetary policy.
He suggested buying the S&P 500 index at 5,300 points, which is down another 4% from Thursday's close. He indicated that if accompanied by more stock outflows, a surge in fund managers' cash levels to over 4% of assets under management, and a widening of the U.S. high-yield corporate bond spread to 400 basis points, this level would indicate the end of the sell-off.
According to Bank of America, citing EPFR Global data, approximately $2.8 billion flowed out of global equity funds in the week ending March 12, marking the largest redemption so far this year. However, Hartnett noted that this only represents a small portion of the $156 billion inflow year-to-date