The Dow is beating the broader market to a degree not seen in almost a century.
The Dow Jones Industrial Average is down 5.3% this year, which isn’t usually a cause for celebration. But that performance looks downright golden when compared to the broad S&P 500, which is down 15%, and the tech-heavy Nasdaq Composite, which is down 27%.
The Dow’s year-to-date lead over the S&P 500 is its widest since 1933. The Dow’s lead over the Nasdaq at this point in the year is its widest since 2000. Of the three indexes, the Dow is the only one not in one Bear market defined as a decline of 20% or more from a recent high.
The divergence is another sign of how the Federal Reserve’s aggressive rate hikes this year have rocked every corner of the market. As the Fed attempts to slow the economy and a potential recession looms, investors are rushing to stocks of so-called value companies that are now generating money for owners. Tech companies that promise high growth across the board in return for expensive shares have seen their stocks falter.
This gives a boost to the Dow, which is believed to be the pillar of the US economy. Its 30 members include McDonald’s Corp., Boeing Co., and JPMorgan Chase & Co. The Nasdaq, with more than 3,700 components, is widely regarded as a technology benchmark. The 500-member S&P has long been considered the broadest benchmark for the US stock market, and technology companies play a big role.
The Dow isn’t always the market leader. In 2020 and 2021, when interest rates were near zero, investors had fewer opportunities to invest their money for good returns. That left investors more willing to bet on riskier stocks like tech companies. The pandemic that sent people online to work and play also boosted tech companies. In 2020, the Dow gained 7%. The Nasdaq rose 44%.
But this year, tech stocks aren’t such a hot trade. Megacaps like Apple Inc., Microsoft Corp., Amazon.com Inc., and Google parent Alphabet Inc. are all down more than the S&P 500, proving a drag on both the S&P and the Nasdaq.
Also, both indices are weighted by market capitalization, so larger companies have a greater impact. That means a bad year for tech giants S&P and Nasdaq will weigh particularly heavily.
“The S&P has a cap-weighted problem,” said Andrew Slimmon, US equities portfolio manager at Morgan Stanley Investment Management.
As the Fed looks set to continue raising rates into next year, investors and strategists say the Dow could continue to lead the market. While the central bank has signaled plans to slow the pace of its rate hikes, officials said persistent inflation warranted further monetary tightening next year. Friday’s jobs report showed the job market remains hot, pushing prices higher. In the coming week, investors will be waiting for the November PPI for the latest inflation indicator.
Unlike the other two major indices, the Dow is calculated by adding the prices of the 30 stocks together and dividing by a factor that accounts for changes like stock splits. This means companies with a higher share price have a greater impact on index movements, regardless of their overall market value.
The Dow’s top-performing stock this year is Chevron Corp., which is up 54% amid a boom in oil prices. Chevron is also the largest contributor to the Dow’s performance, thanks to its heavier weighting in the blue-chip index relative to the S&P 500. Other top contributors such as Amgen Inc. and UnitedHealth Group Inc. have a greater impact on the Dow than the broad benchmark.
The Dow doesn’t include companies like Amazon, which fell 44% in 2022. Amazon has been the biggest detractor for the S&P 500 so far this year, according to data from the S&P Dow Jones indices from late November. S&P Dow Jones Indices includes the Dow and the S&P 500.
The 30 Dow components are all included in the S&P 500 as well. Generally, the Dow has a lower exposure than the S&P 500 and Nasdaq Composite to the technology sector, which has suffered this year. It has a larger weight in healthcare, financials and industrials, which have outperformed.
“If you think interest rates are going to stay high for longer, then this environment of value outperforming growth is likely to continue,” said Bob Doll, chief investment officer at Crossmark Global Investments. He said his company is looking to add to its holdings in energy, healthcare and financial stocks.
Investors have poured more money into funds tracking the Dow this year than in previous years. Passively managed U.S. mutual funds and exchange-traded funds that track the Dow saw net inflows of about $2.1 billion through October this year, the highest net inflows in the first 10 months of the year since 2017, according to Morningstar Direct.
Still, there’s a lot more money following the S&P 500. U.S. mutual funds and exchange-traded funds, which track the S&P 500, recorded $71 billion in net inflows through October, according to Morningstar data.
“The amount of attention relative to the amount of assets invested in a Dow index seemed a little off-balance to me,” said Todd Sohn, ETF strategist at Strategas Securities.
Many of Mr. Sohn’s customers have been asking about the Dow recently, he said. He believes the Dow could continue to outperform at least into next year.
For clients interested in gaining exposure to the Dow, Mr. Sohn recommends the SPDR Dow Jones Industrial Average ETF Trust, which tracks the performance of the blue-chip index.
When clients disregard the Dow’s price-weighted methodology, it suggests an ETF that tracks the equally-weighted S&P 500 — giving equal status to the smallest and largest companies in the index. The equally weighted S&P 500 is down 8.8%, better than its traditional counterpart.
The Dow’s advantage this year comes as no surprise to Jay Hatfield, chief executive and portfolio manager at Infrastructure Capital Advisors. He said that when he introduced his eldest daughter to investing about 15 years ago, he had her pick stocks from the Dow given the index’s reputation for being reliable large-cap companies. She chose Walt Disney Co.
“We said earlier in the year that the Dow would outperform the S&P,” Mr. Hatfield said. “We had no idea how right we would be.”
Write to Hannah Miao at [email protected]
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