Is The Dow Likely To Keep Outperforming The NASDAQ?
Mike Zaccardi, CFA, CMT | Oct 31, 2022 05:34
- Value keeps winning comfortably against growth in 2022
- The blue-chip Dow might put in its best monthly performance since 1976
- I assert the Dow will keep rallying relative to the growth-heavy NASDAQ Composite into year-end
What a month it has been for the domestic stock market. Amid a still-high U.S. dollar index and interest rates that are not far from their cycle highs, equities staged an impressive comeback during the back half of the month. Even with a shaky earnings season, too, both the Dow Jones Industrial Average and the NASDAQ Composite jumped last week.
For the month, through last Friday, the Dow was up a massive 14.4%, pacing for its best month since 1976, while the NASDAQ was higher by just 5%. That nearly ten percentage point difference is among the biggest monthly gaps we’ve seen in the last four decades outside of the year-2000 dot-com crash.
h2 October Performances Through Last Week: Dow > NASDAQ/h2Source: Stockcharts.com
h2 Monthly Relative Returns Last 40 Years: Dow Versus NASDAQ/h2Source: Stockcharts.com
What’s driving the difference? Look no further than sector exposure. The Dow’s price-weighted construct means that the Health Care sector features a massive 22% position in the index. The Information Technology sector is just 19% of the blue-chip average.
Contrast that to the growth-heavy NASDAQ Composite, which has a whopping 43% tilt toward the I.T. sector and is less than 9% exposed to Health Care stocks. Interestingly, the only major NASDAQ Composite ETF is the Fidelity Nasdaq Composite Index ETF (NASDAQ:ONEQ), while there are several NASDAQ 100 and DJIA index funds.
Get The App
According to ETF.com, UnitedHealth Group (NYSE:UNH) is 11% of the DJIA. Apple Inc (NASDAQ:AAPL), by contrast, is 13% of the NASDAQ and just of the Dow.
h2 DIA And ONEQ Comparison: Major Sector Differences Drive Sharp Return Differentials YTD/h2Source: ETF.com
Active investors might wonder which might be a better play going forward. Like so many top-down investment decisions, it comes down to your stance on how value versus growth performs and which sectors you believe will do better. In general, expect the Dow to keep beating the NASDAQ if value and dividend equities keep up their alpha.
As a technician, I think it’s more likely that the trend should remain your friend heading into year-end. Consider that tax-loss selling sometimes results in the year’s losers going on to underperform in the final weeks of the year. Moreover, momentum, in general, dictates that what has worked should keep working in the short run.
h2 Seasonality Similar Between XLV And XLK/h2Source: Equity Clock
We can also check in on seasonal trends between the Health Care Select Sector SPDR Fund (NYSE:XLV) and the Technology Select Sector SPDR Fund (NYSE:XLK). According to Equity Clock, using the past two decades of performance data for the period ending Dec. 31, 2021, the edge again goes to Health Care. That sector has tended to rally about four percentage points, more than half its typical annual gain, during the final two months of the year. XLK, however, sees a smaller portion of its yearly advance during November and December, though still about +4%.
h2 The Bottom Line/h2All the recent hoopla about the Dow’s massive October gain might have you curious about allocating more toward an ETF tracking the century-old index. I assert that could be a winning trade against, say, a growth-heavy index like the NASDAQ Composite. The Dow’s relatively high allocations to sectors like Health Care, Financials, and Industrials with somewhat light weightings in I.T. and Communication Services offer an interesting way to play a continued rebound in the value versus growth trade.
Disclosure: Mike Zaccardi does not own any of the securities mentioned in this article.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.