The Dow Jones Industrial Average could've used a "Santa Claus rally" to recover from a particularly weak month, but the jolly fat man was skipping over Wall Street for a second straight year.
The Dow DJIA ended the month of December about 5.3% lower. That's a much steeper decline than the S&P 500 SPX, which ended the month down 2.5%. Meanwhile, the Nasdaq Composite COMP gained 0.5%. So even though performance was mixed, both the S&P and Nasdaq left the Dow in the dust.
This was the Dow's worst December performance since 2018 and its largest monthly percentage drop since September 2022, according to Dow Jones Market Data.
But before diving into why the Dow fizzled in the past month, it's important to remember that stocks saw a significant rally after Election Day, pushing the Dow to finish above 45,000 for the first time on Dec. 4.
"In our view, we've had a pretty tremendous run-up," Charlie Ripley, senior investment strategist at Allianz Investment Management, told MarketWatch.
It may have been increasingly hard to justify stocks hitting new all-time highs, and a pullback may have been due. But the Dow slipped throughout the first half of the month, while the S&P was mostly flat and the Nasdaq continued to grow.
However, all three indexes saw significant declines on Dec. 18 after the Federal Reserve meeting. Even though the Fed cut rates again, Chair Jerome Powell projected only two cuts of 25 basis points each in 2025, and described how inflation may remain sticky through next year. Investors may have been displeased by that assessment, and stocks ended sharply lower that day.
"We got that negative shock from Powell," Steve Sosnick, Interactive Brokers' chief strategist, told MarketWatch. "He didn't actually say all that much that we weren't expecting - markets were already pricing in only two rate cuts - but it was more hawkish than I think some of the most bullish market participants had hoped for."
The negative shock led into the holidays, when trading volume is usually thinner. Historically, the holiday period tends to be good for stocks, but this year, the thin trading meant lower liquidity and more exaggerated stock movements.
"If people are taking some chips off the table, you tend to see these moves a little bit more exaggerated," Ripley said.
Why did the DJIA get hit the hardest?
Why did the other indexes fare better than the Dow?
"It's tech - tech is driving the bus," Sosnick said. "Tech wins, the markets go up. Tech loses, the markets fall."
In December, a handful of tech names did really well. Apple Inc. $(AAPL)$ was up about 4% for the month and Amazon $(AMZN)$ was up about 3%. Since both are included in the index, they helped push the Dow higher. Meanwhile, Alphabet Inc. $(GOOG)$ $(GOOGL)$ and Tesla Inc. $(TSLA)$ - neither of which is included in the Dow - were up over 10% and 16%, respectively, for the month.
"Tech had really been propelling the markets higher. And the Dow is not a tech-based index," Sosnick said.
On top of that, the Dow Jones Industrial Average is a price-weighted index, making it unique to the market-cap-weighted S&P 500 and Nasdaq Composite. That means stocks with higher share prices influence the index more than stocks with lower prices. So in December, Apple's monthly gains got less weight than Microsoft Corp.'s $(MSFT)$ monthly losses.
This price-weighted structure creates a bit of randomness in the performance of the Dow, said Sosnick, because it gives certain companies outsized influence in affecting the average.
One of the companies with the most influence was UnitedHealth Group Inc. $(UNH)$, which as of Tuesday has the second-biggest share price of the companies in the Dow. UnitedHealth Group has had a rough month, in part due to the killing of Chief Executive Brian Thompson on Dec. 4.
Other blue-chip stocks such as Caterpillar Inc. $(CAT)$, Home Depot Inc. $(HD)$ and Sherwin-Williams Co. $(SHW)$ were also down significantly in December.
"I think there's some more idiosyncratic risk associated to those names," Ripley told MarketWatch. "Particularly UnitedHealth Group, I think, has a significant contribution to that change in the Dow for the month of December."
Due to these idiosyncratic risks, investors may want to take the Dow with a grain of salt when using it as a measure of the overall market. There may be months when the Dow is out of sync with the other indexes.
The Dow Jones Industrial Average ended Tuesday - the last trading day of the year - around 0.1% lower. Despite the weak final month, the Dow did have a strong year, gaining 12.9% in 2024, and it has grown about 28.4% over the past two years. Still, this pales in comparison to the S&P 500, which grew 53.2% over the past two years, and the Nasdaq Composite, which grew 84.5%.
