Is The Dow Jones Forecasting Turbulence?

Last year, the NASDAQ performed best among the three major indices, eclipsing the S&P 500’s 24.7% return by a margin of almost twenty percentage points. The laggard among the group was the Dow Jones Industrial Average, up just 13.7%.

As the new year dawns, however, the odds may favor the caboose of the group, the Dow Jones, taking the lead and leaving the S&P 500 and the NASDAQ in its rearview mirror.

It’s not an obvious bet, but here’s why the tables may turn in favor of the Dow this year.

What Does The Dow Jones Industrial Average Measure?

The Dow Jones Industrial Average measures the aggregate change in prices of 30 large American enterprises listed on the NYSE and NASDAQ exchanges.

Companies featured in the Dow include American Express (NYSE:AXP), Apple (NASDAQ:AAPL), Boeing (NYSE:BA), Amgen (NASDAQ:AMGN), Coca Cola (NYSE:KO), McDonald’s (NYSE:MCD), Microsoft (NASDAQ:MSFT), Johnson & Johnson (NYSE:JNJ), and Verizon (NYSE:VZ) among others.

In short, it’s a veritable who’s who of the top companies in the United States.

The Dow Is Not What You Think It Is

For many, the Dow is an old stodgy index that is poorly constructed. After all, it’s a price-weighted index, meaning that the prices not market capitalizations of its constituents affect its makeup. That contrasts with the S&P 500 whereby just a few firms, Amazon (NASDAQ:AMZN), Apple, Meta (NASDAQ:META), and Microsoft, dominate the others due to their large market capitalizations.

It’s a silly construction to base the weightings of the Dow on prices when prices can be manipulated so easily. All it takes is management to declare a stock split, for example, to impact share prices materially.

Nonetheless, the Dow has a quality that makes it somewhat unique. It is the flagship index for foreign capital and so movements in it can provide insights as to where foreign investors are allocating capital. More particularly, if they deem risks to be high in international affairs, they are more likely to move money to where they perceive the safe haven is, the United States.

Why the Dow Looks Different To Other Indexes Now

Interestingly, the Dow Jones Industrial Average offers a different technical picture versus the other indices now.

When we zoom out to view the yearly picture of the Dow, we see that the movement this year resulted in a breakout to higher highs.

 So far, that has not occurred with the S&P 500, which simply reclaimed the losses of 2022. In spite of the 24.7% rise this year, the S&P 500 merely offset the 20% decline in 2022.

But the Dow Jones Industrial Average roared higher and broke out to new highs, and that is significant because it suggests foreign capital is likely more fearful than ever, but of what?

Does War Lie Ahead?

As 2024 kicks off, some astute analysts have observed that the United States has never been in a more precarious position in terms of leadership or economically.

It’s universally agreed that the US is as divided politically as ever, but economically it’s arguably entering a very worrisome phase too with interest payments on debt rising at the rate of around $1 trillion per quarter now.

The combination of economic and leadership weakness alongside political division means, in the view of Kyle Bass, that China is more likely to pounce and invade Taiwan than ever before.

Chinese leadership has made it clear that bringing Taiwan under the broader Chinese fold is a stated mission and it’s simply a question of whether that can be done politically or militarily.

If they do make a strategic move to invade, summer time is historically when military escalations take place. And it seems in advance of such a move, capital flows are flooding into the Dow as a perceived safe haven for capital.

The goal of foreigners at such times is often a return of capital more so than a return on capital. If they see that they can get their money back by investing in the Dow versus keeping it abroad, which could be more risk, then the transfer of capital to US shores makes a good deal of sense.

How Should You Invest

If the Dow is perceived as reflecting the movements of foreign capital then the S&P 500 is more representative of domestic, institutional flows while the NASDAQ is most closely associated with retail investors.

The failure of the S&P 500 and NASDAQ to break out on yearly charts suggests the outperformance seen in 2023 in those indices relative to the Dow could be coming to an end.

If you were to view the three as jockeying for position, then the laggard, the Dow, has all the hallmarks of catching up following its yearly technical breakout.

As a result, investors who have been riding the waves of the NASDAQ or S&P 500 higher last year and neglecting the Dow Jones Industrial Average may well want to take a closer look at the Dow in 2024. At the very least the technical charts suggest it will be the winner over the coming year or two, even if only on a relative basis.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.