Factors Behind the Dow’s Weakness
The Dow Jones Industrial Average experienced its longest losing streak since 1978, falling for nine consecutive trading days. This slump has come as a surprise to many investors, given the strength of the postelection rally that preceded it.
Just weeks ago, markets seemed unstoppable, with stocks reaching record highs. However, a notable decline in market breadth—measured by the number of stocks advancing versus declining—has disrupted this momentum. Since early December, the S&P 500 and Nasdaq Composite remain near their all-time highs, but the Dow has struggled, finishing below its 50-day moving average for the first time since the November election.
What’s Dragging the Dow Down?
Narrow Breadth
The downturn isn’t isolated to the Dow. Across the market, previously robust sectors have lost steam. Investors are now gravitating back to Big Tech and semiconductor stocks, such as Broadcom Inc., while value-oriented areas like small caps and financials have underperformed.
Since December began, financials within the S&P 500 are down 4.4%, with utilities and energy faring even worse. Broadcom and other tech leaders have supported broader indexes, but uneven performance has weighed on the Dow, which includes a smaller, more concentrated set of stocks.
Brian Allen, Chief Investment Officer at CS McKee, noted the Dow’s inherent vulnerability due to its narrow composition, which exacerbates its reaction to underperforming components.
Record Declines in Breadth Indicators
Market breadth has narrowed significantly. For 12 straight trading days, more S&P 500 stocks declined than advanced, the longest streak since at least 1999. Additionally, only 40.6% of S&P 500 stocks are trading above their 50-day moving averages, marking the lowest level since May.
Idiosyncratic Pressures
The Dow’s decline over the past nine days can largely be attributed to UnitedHealth Group Inc., which alone accounted for nearly half the index’s 1,564-point drop during this period. UnitedHealth faced challenges from congressional scrutiny over pharmacy benefit managers and negative headlines after the death of a top executive.
Other notable contributors to the Dow’s slump include Sherwin-Williams Co., Caterpillar Inc., and Goldman Sachs Group Inc.
Rising Treasury Yields
Higher Treasury yields have also pressured equities. Concerns that the Federal Reserve may pause rate cuts and expectations of persistent inflation have pushed the 10-year Treasury yield up by 20 basis points this month, reaching 4.397%.
These rising yields have disproportionately affected the equal-weighted S&P 500, which has underperformed its market-cap-weighted counterpart.
The Road Ahead
Despite the recent turbulence, there are reasons for cautious optimism. The U.S. economy is growing at an impressive 3% annualized rate in Q3, and corporate earnings projections for next year remain strong.
Mona Mahajan, a senior investment strategist at Edward Jones, suggests that lagging sectors like small caps and value stocks could rebound due to their attractive valuations. However, for broader market strength to return, interest rates may need to stabilize, and inflation trends must remain favorable.
As investors brace for the Federal Reserve’s next policy decision and projections, markets will look for clarity on the direction of interest rates in the coming months.
