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Dow Lags Market by Most Since 1934 as Stock Rotation Continues

Bloomberg logoBloomberg 2/16/2023 Elena Popina

(Bloomberg) -- When the stock market reeled last year, the Dow Jones Industrial Average became a place where many found shelter. As risk appetite returns in 2023, they can’t exit fast enough. 

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The 30-member gauge is up 2% this year, compared with a 7% gain in the S&P 500. The 5 percentage-point gap between the two makes the Dow’s start to a year the weakest relative to the S&P 500 since 1934, data compiled by Bloomberg show.

What helped the Dow in 2022 — its focus on blue-chip companies that offer relative stability in a turbulent economy — is doing the gauge a disservice this year. Now traders are rotating into riskier parts of the market, as some of the most pessimistic scenarios for the economy’s hard-landing have failed to materialize. In fact, Citigroup’s Economic Surprise Index, which measures the spread between data in actual releases and economist expectations in a set of macro indicators, has jumped to the highest level since April.

Widening Gap | The Dow has posted the worst start to a year since 1934 next to the S&P © Bloomberg Widening Gap | The Dow has posted the worst start to a year since 1934 next to the S&P

“That people are moving away from the most financially sound companies and putting money into riskier assets is a testament to a growing optimism about where the stock market and the economy are going,” said Marshall Front, chief investment officer at Front Barnett Associates LLC. “People don’t necessarily care about the Dow when things are good and they are looking for opportunities.”

But as optimism about the state of the economy is rising, so too is the concern that the Federal Reserve will pursue further interest-rate hikes in the months ahead, which could swing risk appetites in the opposite direction. Data on Thursday showed a rebound in US producer prices last month in addition to an unexpected drop in weekly jobless claims, underscoring both persistent inflationary pressures and strength in the labor market. 

This year’s rotation out of the Dow comes after the blue-chip index outperformed the S&P 500 by the most since 1933 last year. Caterpillar Inc., which rallied 16% in 2022, is up just 2.8% this year. The maker of signature yellow diggers and bulldozers also went up during the dot-com bust as the broader market reeled. Likewise, agriculture machinery giant Deere & Co. added a quarter of its value last year and is down 4.6% so far in 2023.

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