Tuesday, February 7, 2023
HomeMarketWhat Bear Market? The Dow Is Down Just Over 5% in 2022. 

What Bear Market? The Dow Is Down Just Over 5% in 2022. 

Traders on the floor of the New York Stock Exchange. The Dow has weathered this year’s uncertainty, outperforming both the S&P 500 and Nasdaq Composite.

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Spencer Platt/Getty Images

For all the chatter about the bear market this year, the
Dow Jones Industrial Average
has managed to experience only benign losses. 

It’s been a rough year for the
S&P 500
and
Nasdaq Composite,
which fell as much as 25% and 36% from their all-time records, respectively. Any drop greater than 20% from a recent high is defined as a bear market.

The root of the problem has been high inflation, which has prompted the Federal Reserve to lift interest rates. That should put additional pressure on economic demand with the goal of lower inflation. Meanwhile, higher rates erode the value of future profits, causing valuations—or the multiple of near-term expected earnings that stocks trade at—to tumble. The stocks most vulnerable to this dynamic are high-growth names, often in the technology sector, that are valued on the basis that a bulk of their profits will come years in the future. 

But now the Dow is down only a little more than 5% for the year to date. One reason it has held up relatively well is that it isn’t as weighted toward technology stocks. To be sure, the Dow has plenty of higher-multiple stocks, but that isn’t because most of the profits are expected to come far into the future, so those stocks are slightly less sensitive to higher rates. The stocks in the Dow are high-quality or “defensive,” attributes that investors often pay a premium price to own. 

That brings us to the second reason: defensiveness. Many Dow stocks are in the healthcare and consumer-staples sectors, which are defensive because households always need to spend money on healthcare, toiletries, and groceries, even if they’re watching their wallets. Within staples,
Walmart
(WMT) and
Coca-Cola
(KO) stocks are both up this year. Even
Procter & Gamble
(PG), which sells toilet paper, toothpaste, and other such items, has seen its stock fall only 8% this year. In the broader healthcare sector,
Amgen
(AMGN),
UnitedHealth Group
(UNH),
Johnson & Johnson
(JNJ), and
Merck
(MRK) are all up so far this year. 

Aside from purely defensive stocks, the Dow has several stocks that are higher-quality, broadly speaking. That often means they are large, well-branded companies that can lift prices to protect profits when their costs rise). It also usually means they have strong balance sheets, so the market expects that, even if earnings falter, the company will remain in existence and may not need to raise money through the debt or equity markets. Examples:
McDonald
‘s (MCD),
Honeywell International
(HON), and
Travelers
(TRV), which are all up in 2022. 

Thirdly,
Chevron
‘s (CVX) gain hasn’t hurt. It’s up more than 50% this year, as the price of oil has soared, partly on the back of sanctions on Russian oil because of the country’s conflict with Ukraine. 

All of those stocks have been key to the Dow’s strength. If they’d all fallen 1% for the year, the Dow’s loss for the year would have been roughly double what it was as of Thursday late morning, according to Dow Jones market data. That’s not far from the S&P 500’s 15% loss for the year. Instead, the Dow has been saved by its stable components. 

Sometimes, the best offense is playing defense. 

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

Credit: marketwatch.com

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