What Caused the Dow to Have Such a Miserable December Compared to Other Indexes?

The Dow Jones Industrial Average (DJIA) ended December with a sharp decline of about 5.3%, marking its worst performance for the month since 2018 and its largest monthly drop since September 2022. In comparison, the S&P 500 fell by 2.5%, while the Nasdaq Composite managed a modest gain of 0.5%. This disparity left the Dow trailing behind its peers, highlighting its weaker performance during the final month of 2024.

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Despite December’s losses, the Dow had a significant rally earlier in the month, achieving a milestone by surpassing the 45,000 mark for the first time on December 4, following a post-election surge. Charlie Ripley, senior investment strategist at Allianz Investment Management, noted that this impressive rally made it increasingly difficult to justify the continuation of record-high stock levels, suggesting a pullback was likely overdue.

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Throughout the first half of December, the Dow steadily declined, while the S&P 500 remained relatively flat, and the Nasdaq continued to rise. However, all three indices experienced notable drops on December 18 following the Federal Reserve’s policy meeting. Although the Fed announced another rate cut, Chair Jerome Powell emphasized that only two more cuts of 25 basis points each were likely in 2025. Powell also warned that inflation might remain persistent in the coming year. This cautious outlook disappointed investors, leading to sharp declines across the major indices that day.

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Steve Sosnick, chief strategist at Interactive Brokers, explained that the Fed’s message, while not entirely unexpected, was more hawkish than some of the most optimistic market participants had hoped. This "negative shock" set a somber tone heading into the holiday season, a period typically associated with low trading volumes and thinner liquidity. Historically favorable for stocks, this year’s holiday period instead saw exaggerated stock movements, partly driven by reduced market participation. Ripley noted that when investors decide to cash out during such low-liquidity periods, market volatility tends to amplify.

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The Dow underperformed relative to the S&P 500 and Nasdaq, primarily due to its composition and weighting. Unlike the tech-heavy Nasdaq and the market-cap-weighted S&P 500, the Dow is a price-weighted index, meaning stocks with higher share prices exert a greater influence. This unique structure often results in outcomes that may seem disconnected from broader market trends.

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Technology stocks were a key driver of the market in December, with certain tech names delivering robust gains. For instance, Apple rose about 4% during the month, and Amazon climbed roughly 3%. However, these contributions were overshadowed by declines in other Dow components. Additionally, high-performing tech giants like Alphabet and Tesla, which gained over 10% and 16% respectively in December, are not included in the Dow, limiting its exposure to the tech sector’s rally.

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The price-weighted nature of the Dow also meant that losses in stocks with higher share prices, such as Microsoft, had an outsized negative impact on the index. In contrast, Apple’s gains carried less weight due to its lower relative share price. Sosnick emphasized that this structure introduces an element of randomness to the Dow’s performance, making it less representative of the overall market.

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One significant drag on the Dow was UnitedHealth Group, the index’s second-highest-priced stock. The company faced a challenging month following the tragic death of its CEO, Brian Thompson, on December 4. This incident contributed to heightened volatility and losses for the healthcare giant. Other blue-chip names, including Caterpillar, Home Depot, and Sherwin-Williams, also posted notable declines, adding to the Dow’s underperformance.

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Ripley suggested that these “idiosyncratic risks” within individual stocks played a significant role in the Dow’s December struggles. He advised investors to approach the Dow with caution as a gauge of the broader market, noting that its performance can sometimes diverge from other indices.

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Despite a weak final month, the Dow ended 2024 with an impressive annual gain of 12.9%. Over the past two years, the index has risen by 28.4%. However, this growth pales in comparison to the S&P 500, which surged 53.2% during the same period, and the Nasdaq Composite, which soared 84.5%.

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These disparities underscore the Dow’s limitations as a market benchmark, particularly during periods when technology stocks dominate the market narrative. The tech sector’s robust performance has propelled the Nasdaq and S&P 500 to significantly higher gains, leaving the Dow struggling to keep pace.

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Looking ahead, investors may need to brace for continued volatility as markets grapple with the Federal Reserve’s cautious policy stance and potential inflationary pressures. The Dow’s underperformance in December serves as a reminder of its unique vulnerabilities and the need for a nuanced approach when interpreting its movements.

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