Why is the Dow Losing Ground Right Now, and Should Investors Be Concerned?

The Dow Jones Industrial Average experienced a significant decline on Tuesday, marking its ninth consecutive losing session—the longest streak since 1978. This abrupt downturn follows a robust postelection rally, leaving many investors surprised. While the S&P 500 and Nasdaq Composite remain near record highs, the Dow has faltered, closing below its 50-day moving average for the first time since the U.S. election on November 5.

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This shift raises questions about the forces behind the Dow's slump and whether investors should be alarmed.

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The Dow's struggles mirror broader challenges across various market segments since the beginning of December. A previously broad-based postelection rally has given way to a narrower focus on Big Tech and semiconductor stocks, such as Broadcom Inc. Conversely, small-cap stocks and value-oriented sectors, including financials, utilities, and energy, have underperformed. Financials within the S&P 500 have dropped 4.4% this month, with other sectors faring worse.

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Leading the charge for the S&P 500 and Nasdaq Composite are Broadcom and members of the "Magnificent Seven" mega-cap tech stocks. Despite their dominance, cracks are starting to show. Nvidia Corp., for instance, re-entered correction territory this week, sparking concerns that the artificial intelligence (AI) boom may be losing momentum.

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This uneven performance has weighed more heavily on the Dow, which is less diversified compared to broader indices. Brian Allen, Chief Investment Officer at CS McKee, noted that the Dow’s narrow composition exacerbates its vulnerability to sector-specific challenges.

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This imbalance is evident in the declining breadth of market participation. On Tuesday, the number of S&P 500 stocks declining outnumbered those advancing for the 12th consecutive session, the longest streak on record since 1999. Only 40.6% of S&P 500 stocks are trading above their 50-day moving averages, the lowest since May.

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A significant portion of the Dow’s recent losses can be attributed to a single stock: UnitedHealth Group Inc. Over the past nine sessions, UnitedHealth has accounted for 750 points of the Dow’s 1,564-point decline.

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This drop equates to a 3.5% loss for the blue-chip index, its worst nine-day performance since August. UnitedHealth’s struggles stem from bipartisan legislative efforts to dismantle the profitable pharmacy benefit manager business and the recent death of Brian Thompson, the CEO of its insurance arm.

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Other Dow laggards include Sherwin-Williams, Caterpillar, and Goldman Sachs, which have also faced challenges.

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Higher Treasury yields are another factor weighing on the market. Expectations that the Federal Reserve may be nearing the end of its interest rate cuts, coupled with persistent inflation concerns, have driven yields higher in recent weeks. The yield on the 10-year Treasury note has risen roughly 20 basis points since the start of December, reaching 4.397% as of Tuesday afternoon.

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This increase has negatively impacted the equal-weighted S&P 500, which has significantly underperformed its capitalization-weighted counterpart this month. Mona Mahajan, a senior investment strategist at Edward Jones, highlighted the importance of lower rates and cooperative inflation for the broader market to regain momentum.

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The Federal Reserve is anticipated to deliver another 25-basis-point rate cut on Wednesday and unveil updated projections, shedding light on its 2024 policy outlook. Despite concerns over rising yields, Mahajan remains optimistic about the market’s prospects, citing the U.S. economy’s strong performance—growing at over 3% during the third quarter—and robust corporate earnings forecasts for next year.

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Heading into 2024, Mahajan expects value stocks, small caps, and other underperforming market segments to recover, driven by their more attractive valuations. These areas of the market may benefit as investors rotate away from overvalued mega-cap tech stocks.

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On Thursday, U.S. stocks ended lower across major indices. The S&P 500 fell 0.4% to 6,050.61, while the Nasdaq Composite dropped 64.83 points, or 0.3%, to 20,109.06. Meanwhile, the Dow declined 267.58 points, or 0.6%, to close at 43,449.90.

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While the Dow’s prolonged losing streak is concerning, it reflects broader market dynamics rather than an isolated issue. Investors should keep an eye on Federal Reserve policy, Treasury yields, and sector-specific developments to gauge the market’s trajectory. With attractive valuations in lagging sectors, there may still be opportunities for long-term growth.

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