The U.S. stock markets have entirely diverged. The Dow Jones Index (DJI) is about to enter a technical bull market, breaking through 34,000 points and going up all the way; the Nasdaq Index (IXIC) is getting worse! The Nasdaq is obviously weak in this turn of rebounds and may break down at any time. At the close of the market last Friday, the Dow Jones Index rose 0.45% to 34347.03 points, while the Nasdaq Composite Index fell 0.52% to 11226.36 points. In this round of rebounds, we can see the Dow Jones index’s rebound in the chart above is much higher than that of the Nasdaq index in the chart below.
Since the beginning of this year, the Dow Jones Index has just fallen by about 5%, and the Nasdaq has fallen by about 28%. Why is the Dow stronger than the Nasdaq in this bear market? This article will analyze the reasons for this.
What is the Dow Jones Index?
The Dow Jones Index is a very authoritative stock index that has existed for a long time. It is an average index of stock prices. It mainly uses some representative companies listed in the United States as objects. Then it calculates the average of the stock prices to obtain the Dow Jones Index. The Dow Jones Index is an index that many people pay close attention to from time to time, especially those who care about the stock market.
What is the Nasdaq Index?
The Nasdaq index mainly covers companies in various new technology industries. It is an index of a relatively new era. Although the Nasdaq index is not as widely known as the Dow Jones index, it is also important to judge economic development in the age of continuous development of new technology industries.
The difference between the Dow Jones index and the Nasdaq index
- The affiliated companies are different. The company that publishes Dow Jones Index belongs to S&P Dow Jones Corporation, while the Nasdaq belongs to the Nasdaq Exchange.
- They contain different quantities of stocks. The Dow Jones Index chooses representative companies, so it only includes 30 stocks. The Nasdaq includes many companies in the new technology industry, so it has more than 5,000 stocks.
- The calculation methods are different. The calculation method used by Dow Jones is the arithmetic average method, while the Nasdaq index uses the weighted average method.
Why is the Dow stronger than the Nasdaq in this bear market?
In short, the Dow Jones Index mainly contains value stocks (21.8 PE). They are distributed in food, finance, medicine, information technology, and other industries. On the contrary, growth stocks dominate the Nasdaq index with a relatively high valuation (30.5 PE), and almost all of them are technology stocks.
For example, among the constituents of the Dow Jones Index, in addition to technology stocks such as Apple and Microsoft, consumer staples such as McDonald’s and Coca-Cola and consumer discretionary such as Nike are value-oriented. These value-oriented stocks tend to be relatively robust in this economic recession. Coca-Cola, held by Buffett, is still hitting new highs this year. But in the Nasdaq index, such value stocks have a smaller weight. After some growth stocks lose the “cheap money” of quantitative easing, the fragile nature of these companies is exposed.
What is the critical point of this U.S. stock bear market round?
The dollars released by quantitative easing in 2020 and further back in 2008 caused inflation. Now the FED is taking those dollars back by raising interest rates, leading inflation to a reasonable range and ensuring economic growth.
Where does the money go during quantitative easing?
If the money printed by quantitative easing flows into the stock market, which stocks do you prefer to buy? Of course, it is a growth stock with room for imagination and fast performance growth. These stocks rose much more than value stocks during the bull market and fell more during the bear market. Growth stocks have a lot of room for imagination and can tell a story for their high valuation.
Since it is necessary to reevaluate stock prices during the interest rate hike cycle, growth stocks must lead. Therefore, the Nasdaq fell more.
In fact, there is a U.S. ETF that is more valuable than the Dow Jones, iShares Core High Dividend ETF (HDV), which has risen by about 6.5% this year. On the contrary, iShares Semiconductor ETF (SOXX), an ETF with higher growth and valuation than the Nasdaq index, has fallen by 31% this year, confirming our reasoning.
Although growth stocks will fall more during a bear market, The situation will be reversed during a bull market. The Nasdaq index can obtain higher returns than the Dow Jones during a bull market. It will help if you choose the Nasdaq (growth stocks) in a bull market and the Dow (value stocks) in a bear market. The actual situation is more complicated than the method of value stocks and growth stocks I talked about today. If you are interested in my articles, you can visit Canny Trading.