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Dow Shines as Higher Rates Squeeze Nasdaq’s Tech Stocks

By Andrew McCollum

The Dow is beating the broader market to a degree not seen in nearly a century.

The Dow Jones Industrial Average is down 5.3% this year, which isn’t normally a cause for celebration. But that performance looks downright golden compared with the broad S&P 500, which is off 15%, and the tech-heavy Nasdaq Composite, which has dropped 27%.

The Dow’s year-to-date advantage over the S&P 500 is the biggest since 1933. The Dow’s lead over the Nasdaq at this point in the year is the widest since 2000. Of the three indexes, the Dow is the only one not in a bear market, defined as a drop of 20% or more from a recent high.

The divergence is another sign of how the Federal Reserve’s aggressive interest-rate increases this year have shaken every corner of the market. With the Fed trying to slow down the economy and a potential recession on the horizon, investors are reaching for shares of so-called value companies that generate cash for holders now. Technology companies promising high growth down the line in exchange for pricey shares have seen their stocks stumble.

That is giving a boost to the Dow, which is thought to represent the stalwarts of the American economy. Its 30 members include

McDonald’s Corp.

,

Boeing Co.

and

JPMorgan Chase

& Co. The Nasdaq, with more than 3,700 components, is generally deemed a tech benchmark. The S&P, with 500 members, has long been considered the broadest gauge of the U.S. stock market, and tech firms are a big piece.

The Dow isn’t always the market leader. In 2020 and 2021, when interest rates were near zero, investors had fewer options for places to put their money for good returns. That made investors more willing to bet on riskier stocks like tech companies. The pandemic, which sent people online for work and play, also boosted tech firms. In 2020, the Dow gained 7%. The Nasdaq rose 44%.

But this year, tech stocks aren’t such a hot trade. Megacaps such as

Apple Inc.,

Microsoft Corp.

,

Amazon.com Inc.

and Google parent

Alphabet Inc.

are all down more than the S&P 500, proving a liability to both the S&P and the Nasdaq.

Also, both of those indexes are weighted by market capitalization, so larger companies hold greater sway. That means that a down year for the tech giants weighs particularly hard on the S&P and Nasdaq.

“The S&P has a cap-weighted problem,” said

Andrew Slimmon,

U.S. equity portfolio manager at Morgan Stanley Investment Management.

With the Fed set to keep raising rates into next year, investors and strategists say the Dow could continue to lead the market. While the central bank has signaled plans to slow the pace of its interest-rate increases, officials have said persistent inflation warrants further monetary tightening into next year. Friday’s jobs report showed the labor market remains hot, putting upward pressure on prices. In the week ahead, investors are awaiting the November producer-price reading for the latest gauge on inflation.

Unlike the other two major indexes, the Dow is calculated by adding the prices of the 30 stocks and dividing by a factor that accounts for changes like stock splits. That means that companies with a higher share price have a greater effect on index moves, regardless of their total market value.

The Dow’s top-gaining stock this year is

Chevron Corp.

, up 54% amid a boom in oil prices. Chevron is also the greatest contributor to the Dow’s performance, thanks to its heavier weighting in the blue-chip index compared with the S&P 500. Other top contributors such as

Amgen Inc.

and

UnitedHealth Group Inc.

have a heftier influence on the Dow than on the broad benchmark.

The Dow doesn’t include companies such as Amazon, which has fallen 44% in 2022. Amazon has been the biggest detractor to the S&P 500 year to date, according to S&P Dow Jones Indices data as of the end of November. S&P Dow Jones Indices runs the Dow and S&P 500, among other indexes.

The 30 Dow components are all also in the S&P 500. In general, the Dow has a lower weighting than the S&P 500 and Nasdaq Composite to the technology sector, which has suffered this year. It has a greater weighting to healthcare, financials and industrials, which have fared better.

“If you believe that interest rates are going to stay higher for longer, then this environment where value beats growth is likely to continue,” said

Bob Doll,

chief investment officer at Crossmark Global Investments. He said his firm is looking to add to its holdings in energy, healthcare and financial stocks.

Investors have put more money into funds tracking the Dow this year than in previous years. Passively managed U.S. mutual funds and exchange-traded funds tied to the Dow had about $2.1 billion of net inflows through October this year, the highest net inflows in the first 10 months of the year since 2017, according to Morningstar Direct.

Still, much more money follows the S&P 500. U.S. mutual funds and exchange-traded funds tracking the S&P 500 received $71 billion of net inflows through October, Morningstar data show.

“The amount of attention relative to the amount of assets invested in a Dow index seemed a little off balance to me,” said

Todd Sohn,

ETF strategist at Strategas Securities.

Many of Mr. Sohn’s clients have asked about the Dow recently, he said. He believes the Dow could continue to outperform at least through next year.

For clients interested in gaining exposure to the Dow, Mr. Sohn recommends the

SPDR Dow Jones Industrial Average ETF Trust,

which corresponds with the blue-chip index’s performance.

If clients are wary of the Dow’s price-weighted methodology, he suggests an ETF tracking the equal-weighted S&P 500—which gives the same status to the smallest and largest companies in the index. The equal-weighted S&P 500 is down 8.8%, better than its traditional counterpart.

The Dow’s advantage this year doesn’t surprise

Jay Hatfield,

chief executive and portfolio manager at Infrastructure Capital Advisors. He said when he introduced his oldest daughter to investing about 15 years ago, he had her pick stocks from the Dow, given the index’s reputation of reliable large-cap companies. She chose Walt Disney Co.

“We said at the beginning of the year the Dow would outperform the S&P,” Mr. Hatfield said. “Little did we know how correct we would be.”

Write to Hannah Miao at [email protected]

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