The Nasdaq Composite Lagging Behind

by Warren Seah

There’s nothing worse than kicking someone when they’re down—but sometimes it needs to be done. That’s the case with the Nasdaq Composite, which is on pace to lag behind the Dow Jones Industrial Average in October by the most in any one month since 2002, and could keep bringing up the rear.

Strong Performance in the Stock Market

There’s no denying that the stock market did very well last week. The Dow gained 5.7%, while the S&P 500 rose 4%, and the Nasdaq advanced 2.2%. It was the Dow’s fourth consecutive week of gains.

Impressive Jump in Dow

And what a four weeks it has been. The Dow has jumped 14% in October and is on pace for its best month since January 1976 when the blue-chip benchmark surged 14.4%. The other indexes have fallen short of those gains: The Russell 2000 climbed 11%, the S&P 500 gained 8%, and the Nasdaq Composite rose a paltry 3.9%.

Widening Gap

Monday’s drop—the Dow declined 0.4%, while the S&P 500 fell 0.8%, and the Nasdaq dropped 0.1%—only made the gap wider.

Uncommon Outperformance by Dow

That kind of outperformance by the Dow against the Nasdaq doesn’t happen very often. The Dow has outperformed the Nasdaq by more than nine percentage points this month, the most since February 2002, when it outperformed by 12.35 percentage points, and the seventh-largest monthly gap in 45 years. Monday’s losses—the Dow is off

The Nasdaq’s Underperformance and Big Tech Stocks

The recent underperformance of the Nasdaq can be attributed to its biggest stocks. Meta Platforms, ticker symbol META, witnessed a significant decline of 24% in its value. Similarly, Alphabet (GOOGL) experienced a drop of 4.8%, (AMZN) fell by 13%, and Microsoft (MSFT) slid by 2.6%, all following their earnings reports. Only Apple (AAPL) managed to rise by 5.8% after reporting its results, though it still remains down 1.1% as of Monday.

The challenge faced by technology investors in terms of outperformance is unprecedented. Michael Shaoul, CEO of Marketfield Asset Management, states, “This really is the first time in 20 years that investors in technology have had their assumptions of effortless outperformance challenged to this degree.”

Looking at historical data, the underperformance of the Nasdaq may persist. In 1978, 1980, and 1992, the Dow outperformed the Nasdaq by at least seven percentage points. However, it is worth noting that most instances of Dow dominance occurred during the bursting of the dot-com bubble, totaling 12 from 1999 through 2002. Following some isolated cases in 1978, 1980, and 1992, the S&P 500 subsequently rallied by an average of 9.5% over the next six months. Conversely, during the dot-com bust, the S&P 500 faced an average decline of 9.9% following a month of Dow dominance.

To gauge the current situation accurately, it is crucial to strike a balance. Marta Norton, chief investment officer for the Americas at Morningstar Investment Management, draws a parallel between the tech enthusiasm now and during the dot-com boom but notes a significant difference in quality given our designation of these companies as “Big Tech.” Nonetheless, many of these stocks appear overvalued. Norton expresses the desire to invest in them but emphasizes the importance of doing so when they are reasonably priced.

In conclusion, the Nasdaq’s underperformance can be attributed to its prominent tech stocks. While historical trends suggest the potential continuity of such underperformance, it is vital to consider the uniqueness of the current market scenario. n investment in these stocks should be made with caution, focusing on their valuations and potential for a turnaround.

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