A few things have inspired the weakness in the blue-chip average
Shares of UnitedHealthcare parent UnitedHealth Group have been the biggest drag on the Dow over the past nine sessions.
The Dow Jones Industrial Average fell on Tuesday for a ninth straight day, tallying its longest losing streak since 1978.
Coming on the heels of a torrid postelection rally, this sudden shift might come as a shock to some investors.
It seems like just yesterday that stocks were hitting a seemingly unstoppable string of record highs. But a sharp drop in the number of stocks moving higher has thrown a wrench into the works since the start of December, even as the S&P 500 and Nasdaq Composite remain just below their latest record closing highs.
In addition to cementing its losing streak, the Dow also finished below its 50-day moving average on Tuesday for the first time since the Nov. 5 U.S. election.
So what exactly has been holding down the blue-chip average? And should investors be concerned?
Breadth narrows
The Dow isn’t exactly unique. Many corners of the market have struggled since the start of December.
A broad-based postelection rally has faded. Investors are once again favoring Big Tech stocks and certain semiconductor names like Broadcom Inc.
Meanwhile, small-cap stocks and other more value-focused corners of the market that had outperformed in the immediate aftermath of President-elect Donald Trump’s election win — for example, financials — have struggled. Financials in the S&P 500 are down 4.4% since the start of December, but many other sectors, including utilities and energy, are faring even worse.
As far as the S&P 500 and Nasdaq Composite are concerned, Broadcom and members of the “Magnificent Seven” group of megacap tech stocks have done much of the heavy lifting this month.
But even among these stocks, there have been pockets of weakness: Nvidia Corp. landed back in correction territory this week, stoking worries about whether the artificial-intelligence trade might be running out of steam.
This lopsided performance has had more of an impact on the value-focused Dow, even though the blue-chip average now includes four of the seven members of the so-called Magnificent Seven.
“One of the concerns with the Dow is just how narrow it is,” said Brian Allen, chief investment officer at CS McKee, during an interview with MarketWatch.
The impact is also evident beneath the hood of the index.
For the 12th day in a row on Tuesday, the number of S&P 500 stocks declining surpassed the number of gainers. That is the longest streak on record going back to at least the end of 1999, according to Dow Jones Market Data.
As a result, the share of S&P 500 stocks trading above their 50-day moving averages has shrunk to 40.6%, according to Dow Jones data. That is the lowest reading since May.
Idiosyncratic factors
Much of the Dow’s drop over the past nine days can be chalked up to one stock.
As of Tuesday’s close, UnitedHealth Group Inc. has contributed about 750 points to the Dow’s 1,564-point drop since the losing streak began. To help put that in context, that is about a 3.5% drop — not exactly a huge move. It is the blue-chip gauge’s worst nine-day performance since August, Dow Jones data showed.
UNH has struggled in the face of bipartisan congressional efforts to break up insurers’ lucrative pharmacy benefit manager business. It has also been in the news following the killing earlier this month of Brian Thompson, the CEO of the company’s insurance arm.
Other Dow losers include Sherwin-Williams Co., Caterpillar Inc. and Goldman Sachs Group Inc.
Rising Treasury yields
Concerns that the Federal Reserve might be nearly finished with planned interest-rate cuts, combined with expectations that inflation could persist at or around its current levels, have helped push Treasury yields higher over the past few weeks.
This has helped weigh on the equal-weighted version of the S&P 500, which is dramatically underperforming its capitalization-weighted sibling in December so far.
“You probably need to see rates move lower and inflation continue to cooperate” for the rest of the market to make a comeback, said Mona Mahajan, a senior investment strategist with Edward Jones, during an interview with MarketWatch.
The Fed is expected to deliver another 25-basis-point cut to its policy-rate target on Wednesday. The central bank is also expected to release a fresh batch of projections that could shed light on how many cuts it expects to make next year.
The yield on the 10-year Treasury note has risen roughly 20 basis points since the start of December, to 4.397 as of Tuesday afternoon.
While rising Treasury yields have made some investors nervous, Mahajan said that investors have plenty of reasons to remain bullish. The U.S. economy was on track to expand at a rate of more than 3% during the third quarter. And Wall Street’s forecasts for corporate earnings next year are still for strong growth, as companies outside the megacap tech space start to play catch-up.
Mahajan expects to see value stocks, small caps and other lagging corners of the market benefit from their relatively more attractive valuations heading into next year.
U.S. stocks finished lower on Thursday, with the S&P 500 down 0.4% to 6,050.61, while the Nasdaq Composite fell by 64.83 points, or 0.3%, to 20,109.06.
The Dow fell by 267.58 points, or 0.6%, to 43,449.90.
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