The Dow Jones Industrial Average (DJIA) rose on Wednesday, briefly surpassing 46,600 before stabilising. Wall Street’s current quarterly earnings reports are surpassing expectations, particularly in investment banking and luxury goods, despite ongoing US-China trade tensions and the prolonged US government shutdown.

Morgan Stanley And LVMH Thriving

Morgan Stanley and Bank of America both exceeded earnings expectations, with shares rising 6% and 5% respectively. French company Moet Hennessy Louis Vuitton SE saw its shares soar over 12% after strong earnings results, reinforcing optimism for record-breaking earnings. The US government shutdown, unresolved due to lack of funding resolution, impedes official data release but allows the Federal Reserve to potentially cut interest rates twice by year-end.

The DJIA, a longstanding stock market index comprising 30 major US stocks, is price-weighted, not capitalisation-weighted. Criticised for not being broadly representative, it contrasts with the more inclusive S&P 500. The DJIA’s performance is driven by company earnings, macroeconomic data, and Federal Reserve interest rates, influencing sentiment, credit costs, and inflation impacts.

Dow Theory, developed by Charles Dow, identifies market trends by comparing DJIA and DJTA directions. Trend phases include accumulation, public participation, and distribution. Investors can trade DJIA via ETFs like SPDR Dow Jones Industrial Average ETF, DJIA futures, options, and mutual funds, offering diversified portfolio exposure.

Australia is preparing to release its monthly employment report for September, with expectations of adding 17,000 jobs and maintaining an unemployment rate of 4.3%. Recent months have seen similar modest employment outcomes.

With the Dow Jones pushing past 46,600, the market is clearly focused on strong corporate earnings from banks and luxury brands. This positive momentum from companies like Morgan Stanley and LVMH is overshadowing other significant risks. For now, the path of least resistance appears to be upward, driven by this earnings optimism.

Market Risks And Opportunities

We see a notable disconnect between equity performance and underlying political risks like the ongoing government shutdown and US-China trade tensions. This market complacency is reflected in the CBOE Volatility Index (VIX), which has been trading below 15, a level that historically indicates low market fear. This reminds us of similar periods, like late 2017, where markets climbed despite growing background risks.

The shutdown is creating a unique situation where a lack of official economic data gives the Federal Reserve more reason to proceed with its easing cycle. Markets are now fully pricing in two more interest rate cuts before the end of the year, likely at the November and December FOMC meetings. These anticipated cuts are providing a strong tailwind for stocks, making it difficult to bet against the market in the short term.

In the coming weeks, we should consider riding this bullish wave through short-term call options on the SPDR Dow Jones Industrial Average ETF (DIA). Given the strength in the financial sector, buying calls on standout performers like Bank of America could also be a profitable strategy. The market’s current focus is narrow, so we should align our strategies with the earnings narrative.

However, we must also prepare for an eventual shift in sentiment when the government reopens and delayed economic data is released. Buying longer-dated, out-of-the-money puts on the DJIA for early 2026 could be a cheap way to hedge against a potential sharp correction. This is a prudent measure in case the eventual data reveals economic weakness that the market is currently ignoring.

Looking back at the government shutdown of 2018-2019, we saw the market eventually react to the prolonged uncertainty before recovering. While the primary trend remains up, with both the industrial and transport averages climbing, we should watch trading volumes closely. A rally on declining volume could be a sign of distribution, suggesting smart money is beginning to exit positions.

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