Dow is weighed down by heavy-hitting large caps
The sudden contraction in U.S. consumer spending and global liquidity that brought some of America’s most revered companies to their knees has made the Dow Jones industrial average — meant to represent the country’s leading companies — more a benchmark of laggards.
Since January 1, the gauge of 30 large and established companies has fallen 5.1 percent. The Standard & Poor’s 500, made up of a wider variety of companies, is about flat in the same period.
The Wilshire 5000 Total Market index has gained 2 percent. And the more growth- and tech-oriented Nasdaq Composite index has rallied 14 percent.
Steep slides in shares of General Motors Corp. and Citigroup Inc., which hit record lows this year, weighed on the Dow’s performance. These stocks were dropped from the blue-chip barometer earlier this month.
But even with new entrants Travelers Cos. and Cisco Systems, the Dow may fail to catch up as a recovering economy favors smaller companies that don’t sell much of their wares overseas.
"We think the recession is ending right here and the resumption of growth will disproportionately benefit smaller-capitalization companies," said Phil Orlando, chief equity strategist at Federated Investors, which manages about $409 billion.
The performance of the Dow-30 over the two last years has shown that a traditional strategy of favoring large-cap companies over smaller ones during tough times didn’t pan out.
"Going large didn’t work this time. Staying small helped," said James Paulsen, chief investment strategist at Wells Capital Management, which manages about $375 billion.
In particular, tech, retail and emerging-markets sectors all outperformed the S&P 500 since the summer of 2007, when the financial crisis got into gear, he noted.
Since the bear market started in October 2007, the Dow has fallen at about the same pace as the S&P 500 and the Wilshire 5000, registering a roughly 40 percent drop.
For just this year, however, the other indexes have left the Dow in the dust. One factor dogging the blue-chip gauge: Several constituents were the big banks and financials at the epicenter of the mortgage and credit crisis.
Shares of Bank of America Corp cash advances., a Dow-30 component, plunged to below $3 back in late February. The stock is down 10 percent since January 1.
Citigroup’s stock tumbled to an all-time low under $1 in March as worries grew that huge losses would lead to a government takeover. The publishers of the Dow Jones industrial average removed Citi about a month ago, at the same time as GM, another erstwhile component, filed for bankruptcy.
Even General Electric Co., the worst performer among the Dow’s current constituents with a 29 percent year-to-date loss, owes much of its woes to its finance arm.
Big percent rebounds in financial stocks since early March have had limited benefit to the Dow average because, unlike other indexes, it’s price-weighted rather than market-cap weighted. That means stocks trading at a higher price can have an outsized impact on the average.
Bank of America shares, for instance, have more than quadrupled since early March. But because they are worth only about $12.75 a piece, they have less of an impact than changes in higher-priced stocks, such as IBM, at $103 a share, or Exxon Mobil Corp., at $69 a share.
Since hitting a closing low on March 9, the Dow has rallied 27 percent — slightly under the 33 percent gain in the S&P 500 and the 35 percent gain in the Wilshire 5000.
It’s likely to continue to underperform as a recovery favors tinier, more nimble companies, analysts say. Fluctuations in the U.S. dollar are one reason.
Federated’s Orlando anticipates that the dollar has ended its slide and will strengthen against the euro. A stronger dollar favors more domestic-oriented companies over larger multinationals — the type of companies, such as McDonald’s Corp. and General Electric, that make up the Dow.
Unless they’re struggling against huge job losses, plunging industrial output and a historic credit squeeze, multinationals tend to benefit when the dollar slips.
"If we’re right that the dollar will strengthen over the next year, that’s not great for large-capitalization companies," Orlando said.
Filed under: management by Specialist