The Dow Jones Industrial Average (INDEXDJX: .DJI) is stealing the financial headlines today. The Dow closed at a new record high yesterday (overnight Aussie time), topping 30,000 points for the first time.
The Dow is now up 61% from its 23 March lows.
Yesterday’s boost comes after United States share markets, and indeed most every major global index, posted another day of strong gains.
Investor optimism is surging, with US election uncertainty fading and President-elect Joe Biden appointing former Fed chair Janet Yellen as his Treasury Secretary. Even more importantly, the promise of multiple effective COVID-19 vaccines is stirring hopes of a major global economic rebound in 2021.
Now in the opening sentence I wrote that the Dow is “stealing” headlines. That’s because it’s not just the Dow charging higher. The Dow isn’t even the only major share index hitting new all-time highs.
The S&P 500 Index (INDEXSP: .INX) also hit a new all-time high, closing 0.2% above the previous record high set on 16 November.
The S&P 500, however, closed at 3,635 points. And 3,635 doesn’t have the same psychological impact as 30,000. Hence the Dow gets the spotlight.
While not posting a new record, the tech-heavy Nasdaq Composite (INDEXNASDAQ: .IXIC) gained 1.3% yesterday. That puts the Nasdaq just 0.16% below its own 2 September all time-highs.
Here in Australia, the S&P/ASX 200 Index (ASX: XJO) is powering ahead today as well, up 0.8% in late morning trading. That puts the ASX 200 up 13.0% so far in November and in positive territory year-to-date. Though the index is still 6.5% below its own all-time high, set on 20 February.
Dow to 40,000, ASX 200 to…?
If you’re watching share prices charge higher and are thinking this bull market run may be nearing its end, you’re not alone.
But that kind of thinking could be costly.
In fact, Hilary Kramer, chief investment officer at Kramer Capital Research, sees the potential for a lot more share price growth ahead. Focusing on the Dow’s new 30,000 point record, she says (from the Australian Financial Review):
If all goes well we should see 40,000 before 2024. After all, the Dow has lagged benchmarks with heavier Big Tech allocations (17 per cent compared to 25 per cent for the S&P 500 and arguably above 50 per cent on the Nasdaq), but now that the vaccines are coming, it’s time for the ‘old economy to get back to work and take advantage of the Fed’s largesse.
Ross Mayfield, investment strategy analyst at Baird, highlights the forward-looking nature of share markets, even in these dark days, is spurring on the bull market (quoted by the AFR):
If 2020 has shown us anything it is that stock markets have a tremendous ability to look past bad news if there is sun on the horizon.
Gene Goldman is the chief investment officer at Cetera Financial Group. He echoes that sentiment, pointing out cashed up investors’ long term optimism is driving share prices higher (from Bloomberg):
There’s nothing else to buy. People have this excess cash and they’re buying into the market and they’re chasing it. People are ignoring the short term and just jumping in and buying. All the short terms news is being ignored for long term optimism.
Advantage cyclical shares
With the recovery play picking up speed, investors interest in cyclical shares is ramping up.
These are shares that tend to see their earning and profits, and hence their share prices, rise when the economy is growing. And conversely fall when the economy is lagging.
November has already seen many leading cyclical shares post strong share price gains. But with most still down for the year, they could have a lot further to run.
Bill Callahan, investment strategist at Schroders, says (from Bloomberg):
Even though we’ve seen this pretty sharp rotation into cyclical stocks, we think this could go on for much longer given how unbalanced many investors’ portfolios are… With the vaccine announcement, it really doesn’t matter if the vaccine is distributed in the second quarter or third quarter next year, there is a light at the end of the tunnel…
Investors and institutions and fund managers are still heavily overweight to defensive and growth sectors. There’s still a lot of money that needs to come into these cyclical sectors before the move is over. I think it’ll continue to go higher.
Two quality ASX cyclical shares to buy today
There are a number of quality cyclical shares in the travel, leisure, and mining sectors that you may wish to add to your holdings.
Today we look at 2 of those.
First up, Sydney Airport Holdings Pty Ltd (ASX: SYD).
Ben Clark, from TMS Capital, tells Livewire Markets Sydney Airport is a buy:
I’d have a buy on Sydney Airport. I think this is probably the safest way to play the reopening of travel. We think you can be wrong by a year with Sydney Airport, but ultimately, you can still be right. There’s a great asset behind it. Regardless of whether airlines go to profitable or less profitable routes, you’re still going to get foot traffic going through the airports.
The Sydney Airport share price has gained 25% so far in November, though it’s flat in intraday trading today (at the time of writing). Shares remain down 23% from the 23 January recent highs.
The second ASX cyclical share for your consideration is Australian resources company Alumina Limited (ASX: AWC).
Here’s why Investors Mutual portfolio manager Daniel Moore likes Alumina Limited (from the AFR):
Alumina is the main commodity required to make aluminium, and the price of alumina has been hit in the short term because of weakness in demand caused by COVID-related shutdowns. Alumina’s current share price is capitalising current low margins, which are 30 per cent below our view of sustainable long-term margins…
As economic activity recovers, demand from the building and construction and car manufacturing sectors will be supportive of demand for Alumina’s products, and lead to higher prices and earnings.
The Alumina share price, up 1.6% in intraday trading, is down 19% year-to-date.
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Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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