Traders work on the floor at the New York Stock Exchange on December 10, 2024.
Brendan McDiarmid | Reuters
The Dow Jones Industrial Average continued to decline for nine straight days, recording its longest losing streak since February 1978. What is happening and how worried are investors?
First, let's explain which stocks cause losses.
The biggest lag in the 30-stock Dow Jones index during this losing streak was UnitedHealthThis contributed to more than half of the decline in the weighted average price during the past eight sessions. The insurer is down 20% this month alone amid a widespread sell-off in pharmacy benefits managers after President-elect Donald Trump pledged to “eliminate” drug industry middlemen. UnitedHealth is also going through a turbulent period with the fatal shooting of Brian Thompson, CEO of its insurance unit.
Then there is an ongoing rotation with investors selling cyclical names in the Dow that initially emerged when Trump was elected in November. Sherwin Williams, Caterpillar and Goldman Sachsall stocks that typically gain when the economy accelerates, each fell by at least 5% in December, pulling the Dow Jones down significantly. These names all had a big November as they were seen as beneficiaries of Trump's regulatory and pro-economy policies.
The Dow Jones Index, which consists largely of consumer discretionary and industrial names, is widely viewed as an indicator of general economic conditions. The extended sell-off coincided with renewed concerns about the economy's weakness in light of a small jump in unemployment claims data released last week. However, investors remain very optimistic about the economy for 2025 and see nothing on the horizon like the stagflation of the late 1970s.
Most investors ignore this
There are several reasons to believe that the Dow's historic losing streak is not a major concern, but merely a glitch in a price-weighted measure that dates back more than a century.
First and foremost, the Dow Jones anomaly comes at a time when the broader market is still buoyant. the Standard & Poor's 500 The price reached a new high on December 6 and is less than 1% away from that level. Heavy technology Nasdaq Composite It just reached a record high on Monday.
Meanwhile, while the length of the Dow Jones sell-off is concerning, the magnitude is not. As of midday Tuesday, the average was down only about 1,582 points, or 3.5%, from its closing level on December 4, when it first closed above the 45,000 point threshold. Technically, a sell-off of 10% or more is considered a “correction” and we are far from that.
The Dow Jones Index was first created in the 1890s to be a model for an average investor's portfolio — a simple average of the prices of all components. But it may be an outdated method nowadays due to its lack of diversification and concentration in only 30 stocks.
“The Dow Jones Industrial Average has not reflected its original target in decades. It is not really a reflection of industrial America,” said Mitchell Goldberg, president of ClientFirst Strategies. “Its losing streak is a reflection of how investors are gobbling up tech stocks.”
The price-weighted nature of the Dow means it doesn't capture the massive gains from mega-cap stocks as well as the S&P 500 or the Nasdaq. Although Amazon, Microsoft and apple Although the Dow Jones is up at least 9% this month, that's not enough to pull the Dow Jones out of chaos.
Many traders believe the decline is temporary and that the Fed's decision this week could be a catalyst for the recovery especially under oversold conditions.
“This pullback will be a pause before reversing higher to close out 2024,” said Larry Tintarelli, founder and chief technical strategist of Blue Chip Daily Trend Report. “We expect buyers to arrive this week…the index’s internal indicators show oversold readings.”
— CNBC's Michelle Fox, Fred Imbert and Alex Haring contributed reporting.
