Blue chips are trailing the broader equity market

A quirk in a key index’s construction is showing its weakness as an indicator of the stock market’s overall performance

Blue chips are trailing the broader equity market

Even the best fall down sometimes — and even when they don’t, they can fall behind.

That’s what’s happening to the Dow Jones Industrial Average, which is at risk of lagging behind the S&P 500 for the first time in four years, as reported by the Wall Street Journal.

“The blue chips have risen 15% in 2019 and are within 2.1% of July’s all-time high, while the S&P has advanced 20% and is just 1% from setting a record high,” the Journal said. “The blue-chip index hasn’t underperformed the broader index since 2015, when it slid 2.2% versus a 0.7% decline for the S&P.”

The relative underperformance of the Dow was ostensibly due to its construction as a price-weighted index. That means it’s more influenced by stocks with greater share prices, as opposed to market-cap weighted indexes like the S&P that place more importance on companies with higher valuations.

“Analysts argue the S&P is a better, broader indicator of the overall direction of the stock market,” the Journal said.

The trend toward market-cap index funds is also a factor, as investors have put considerably more assets into funds that track the broad index rather than just the Dow industrials.

The effect of its concentration in price leaders has been particularly painful this year as some of its most influential components ended up among its worst performers. Those include UnitedHealth Group, 3M, Boeing, and Caterpillar.

“Shares of Boeing have been especially tough on the Dow,” the Journal reported, noting a 10% decline on the company’s stock over the past six months that knocked 370 points from the DJIA. “The stock tumbled for the third consecutive session Monday, capping the index’s gains, as the company faced questions about its safety practices.”

3M shares were the second-biggest drag, accounting for an estimated 301-point loss, as it has had to deal with cooling demand and trade tariffs. Disappointing earnings announcements from Travelers and McDonald’s on Tuesday took off another 152 points.

Earnings season has seen the Dow go down as much as 0.5% for October, while the S&P 500 has crept up 0.6%, marking the first time the two have moved in different directions over a given month since June 2018.

The gap between the two would have been wider if not for the overlap in their biggest contributors. Apple, the biggest positive contributor for the Dow, has added as much as 558 points since December; it has also accounted for approximately 6.4% of the S&P’s advance through the end of September.

Microsoft has been the biggest contributor to the S&P through September, but it has been less influential on the Dow. And despite having a combined market cap that falls short of Microsoft’s US$1.05-trillion valuation, three companies — Home Depot, Visa, and Goldman Sachs — have contributed more points to the Dow.


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