Dow May Hinge on Trump Cabinet Pick

The formation of the prospective administration cabinet of President-elect Donald Trump is nearing completion, with certain nominees welcomed by the markets while others have prompted concerns.​

Nomination Reactions

Markets have reacted differently to the people tapped by Trump for roles to serve in his future administration. While his more controversial picks have attracted media attention, markets have focused more on the posts most relevant to securities trading. A few vacancies in that area still need to be filled. The most anticipated appointment by the markets was the replacement for Janet Yellen as Secretary of the Treasury. The announcement of hedge fund manager Scott Bessent reassured and supported markets, with the Dow Jones hitting a new record high in the aftermath. Bessent is considered an "insider" to the markets and a favourite among investors, with the expectation that he will take a more moderate stance on some of the policies that have unsettled business leaders, such as tariffs and spending.

As an illustration of the complex market situation with the nomination process, the positive sentiment from the Treasury Secretary nomination was short-lived, with equities declining after the next round of nominations. While the market was also disappointed by commentary from Fed Chair Jerome Powell during the same session, Robert F. Kennedy Jr.'s nomination to head the Department of Health and Human Services caused concern for pharmaceutical and processed food manufacturers. RFK Jr.'s controversial views on vaccines and food are expected to create potential regulatory hurdles. The healthcare sector accounts for over 18% of the DJIA index, with UnitedHealth having the largest weighting.​

The End of the Ride?

While President Trump has filled out his cabinet, the primary concerns around the potential impact of his policies on the market have largely persisted. Specifically, increased spending and tariffs would likely contribute to higher inflation, which has kept US yields elevated despite an uptick in demand for government debt. This has led some analysts to suggest that value stocks could be more attractive than growth stocks going forward, particularly given the high valuations of growth stocks. The DJIA's relatively high weighting in staples, defensive stocks, and large conglomerates might mean the index could perform better in the longer term, depending on how the proposed policies unfold in reality.

As for the rest of Trump's cabinet, the vast majority of the main offices have been filled, with only five key posts left to be announced, and they would only have a minimal impact on the markets. One of the Administration officials who could garner attention in the future is Jamieson Greer, the proposed head of the Office of the US Trade Representative, as the lead negotiator for foreign trade relations. Previously, the office played a crucial role in the US, Canada, and Mexico free trade agreement. With Trump threatening tariffs even before taking office - over the weekend, he warned of 100% tariffs on BRIC countries if they did not desist from forming an alternative to the US dollar - trade relations are likely to be at the forefront of traders' minds. How Greer handles and communicates trade policy could be pivotal for markets, including the DJIA, which has a large contingent of companies that generate a substantial, if not the majority, of their revenue overseas.​

Dow Jones in Terminal Wedge?

The Dow Jones resembles a terminal wedge pattern, characterised by shorter peaks and troughs. This suggests a maximum high equivalent to the previous upward leg from 42850 to 44500, expected to extend to 45,700. Major support levels are seen at the peaks and troughs, including 43350 and 41650, with the lower wedge line around 44,000 acting as a crucial catalyst. If prices remain within the wedge during a pullback, the upward trend could reach 46,000 and subsequent round levels as the index explores uncharted territory.​

Source: SpreadEx / Wall Street

Key Takeaways

Trump's administration cabinet has prompted varied market reactions, with some nominees like Treasury Secretary Bessent welcomed, while others like Kennedy Jr. for the Department of Health and Human Services raised concerns. The Dow Jones composition might help it perform better in a scenario where Trump's proposed policies on increased spending and tariffs lead to higher inflation, potentially making value stocks more attractive than growth stocks. However, trade relations under the proposed head of the US Trade Representative, Jamieson Greer, will be closely watched.