Dow Jones Racing Towards 20,000

As the Fed is set to decide whether or not it will increase the interest rates this week, markets couldn’t care less. The Dow Jones is at historical highs, pushing towards the 20,000 mark, despite the threat of more expensive money. It seems that the markets are convinced that Trump’s fiscal expansion will out-pace Fed interest rate increases. At least this is the bet that investors seem to be making.

Investor confidence pushing the Dow Jones towards 20,000

Fed interest rate increases could well serve to cancel out any GDP expansion generated by Trumps fiscal plan. That is however, hard to tell. Trump himself seems convinced that he can bring the economy back to a 3%-4% growth rate. Fed experts disagree, putting that figure close to 2%, but if Trump manages to beat that, then growth through fiscal spending might outpace Fed tightening.

Is there a risk of Stagflation?

The markets are more willing to bet on Trumps fiscal plan beating Fed tightening. Investors nevertheless, should keep in mind that increased fiscal spending will bring about inflation. If Trump’s planned fiscal expansion does manage to out-pace Fed tightening, then the risk of stagflation might rise as well. At some point economic momentum from fiscal expansion will run out, and structural problems will once again become prominent. This means that the jobs the fiscal stimulus will create, will run out as inflation continues to grow. Stagflation is definitely a possibility then, but the markets are clearly not considering that now.

Trump rally continues

In this environment the Dow Jones will almost certainly hit 20,000, and the NASDAQ and S&P will continue racing towards new historic highs as well. If the Fed cancels out the effect of fiscal expansion and if stagflation does occur, that will only make the markets fall from a higher point. In the meantime it seems that nothing will be able to stop them. The Trump rally continues.