Nasdaq outperforms as trade concerns keep the Dow down – Index News
March 16, 2018 3:26 pm
Major US stock market indices have performed very differently in recent days. The Nasdaq recovered all its losses to reach fresh all-time highs, but the Dow Jones is still negative in March. The divergence may be owed to the fact that industrial firms stand to lose more than technology companies in a “trade war” scenario, and if trade tensions escalate further, the Nasdaq could well remain the top performer out of the US benchmarks.
Taking a look at the recent performance of the three major US stock indices – the S&P 500, Dow Jones, and Nasdaq Composite – it is straightforward to deduce that the recent concerns over increased protectionism have hit the Dow the hardest, while the Nasdaq has remained largely unfazed. Trade worries started to intensify at the beginning of March, and month-to-date, the Nasdaq is up by almost 3%, the S&P 500 is 1.2% higher, but the Dow Jones is down 0.6%. Year-to-date performances tell a similar story. What is driving this discrepancy?
That can be answered by breaking down the performance of individual sectors in these indices. Broadly speaking, the Dow is an index made up of a high concentration of industrial and export-focused companies, like Boeing or Caterpillar. These firms are likely to be very vulnerable in case of escalating trade tensions and increased tariffs. Their own costs will likely rise, as they now have to pay more for steel and aluminum for example, while demand for their own products overseas will be at risk if other nations choose to retaliate and slap tariffs back on US exports. Put together, increased costs and lower revenues imply reduced profits for these exporting giants, and investors were quick to price this in, evident by Boeing being the worst performer in the Dow so far this month, down by nearly 9%.
Contrast the above with the Nasdaq, an index populated mostly with technology firms. While most of these companies would also be negatively impacted by increased tariffs – remember companies like Apple assemble their products in China – the magnitude of the impact may be smaller compared to industrial firms like Boeing. Technology firms rely less on the exportation of physical goods, as many of them are heavily engaged in software developing. Moreover, the recent signals from the US administration that the next tariffs will be aimed at Chinese technology companies may have helped US technology firms to outperform a little, on expectations for reduced competition from abroad, though many details remain unclear at this stage. Indeed, the technology sector of the Nasdaq 100 is up 5.5% month-to-date in March.
The bottom line is that while concerns over increased tariffs are considered negative for stocks in general, the Nasdaq has been much more resilient to such worries than its major counterparts. This suggests that if trade concerns remain the dominant market theme moving forward, the Nasdaq could well be the top performer out of the US stock indices. Note though, that top performer does not necessarily mean the best positive performance – it could also mean that the Nasdaq may fall by less than other indices in case the turmoil intensifies. Meanwhile, the same logic suggests the Dow may be the worst performer in a “trade war” environment. Of course, safe haven assets like the yen are likely to thrive in such conditions.
Technically, the Nasdaq 100 has recovered all its recent losses and actually reached a fresh all-time high on March 13, which has shifted the broader outlook back to bullish. In case of further advances, immediate resistance may be met near the record high of 7186. Stronger upside extensions could aim for the 7550 zone, which is the 161.8% Fibonacci retracement of the January 29 – February 9 downleg. On the downside, in case the bears seize control, support may be found near the 6645 area, marked by the lows of March 2, with further declines likely to open the way for the index’s recent lows, at 6164.
Major US stock market indices have performed very differently in recent days. The Nasdaq recovered all its losses to reach fresh all-time highs, but the Dow Jones is still negative in March. The divergence may be owed to the fact that industrial firms stand to lose more than technology companies in a “trade war” scenario, and if trade tensions escalate further, the Nasdaq could well remain the top performer out of the US benchmarks.
Taking a look at the recent performance of the three major US stock indices – the S&P 500, Dow Jones, and Nasdaq Composite – it is straightforward to deduce that the recent concerns over increased protectionism have hit the Dow the hardest, while the Nasdaq has remained largely unfazed. Trade worries started to intensify at the beginning of March, and month-to-date, the Nasdaq is up by almost 3%, the S&P 500 is 1.2% higher, but the Dow Jones is down 0.6%. Year-to-date performances tell a similar story. What is driving this discrepancy?
That can be answered by breaking down the performance of individual sectors in these indices. Broadly speaking, the Dow is an index made up of a high concentration of industrial and export-focused companies, like Boeing or Caterpillar. These firms are likely to be very vulnerable in case of escalating trade tensions and increased tariffs. Their own costs will likely rise, as they now have to pay more for steel and aluminum for example, while demand for their own products overseas will be at risk if other nations choose to retaliate and slap tariffs back on US exports. Put together, increased costs and lower revenues imply reduced profits for these exporting giants, and investors were quick to price this in, evident by Boeing being the worst performer in the Dow so far this month, down by nearly 9%.
Contrast the above with the Nasdaq, an index populated mostly with technology firms. While most of these companies would also be negatively impacted by increased tariffs – remember companies like Apple assemble their products in China – the magnitude of the impact may be smaller compared to industrial firms like Boeing. Technology firms rely less on the exportation of physical goods, as many of them are heavily engaged in software developing. Moreover, the recent signals from the US administration that the next tariffs will be aimed at Chinese technology companies may have helped US technology firms to outperform a little, on expectations for reduced competition from abroad, though many details remain unclear at this stage. Indeed, the technology sector of the Nasdaq 100 is up 5.5% month-to-date in March.
The bottom line is that while concerns over increased tariffs are considered negative for stocks in general, the Nasdaq has been much more resilient to such worries than its major counterparts. This suggests that if trade concerns remain the dominant market theme moving forward, the Nasdaq could well be the top performer out of the US stock indices. Note though, that top performer does not necessarily mean the best positive performance – it could also mean that the Nasdaq may fall by less than other indices in case the turmoil intensifies. Meanwhile, the same logic suggests the Dow may be the worst performer in a “trade war” environment. Of course, safe haven assets like the yen are likely to thrive in such conditions.
Technically, the Nasdaq 100 has recovered all its recent losses and actually reached a fresh all-time high on March 13, which has shifted the broader outlook back to bullish. In case of further advances, immediate resistance may be met near the record high of 7186. Stronger upside extensions could aim for the 7550 zone, which is the 161.8% Fibonacci retracement of the January 29 – February 9 downleg. On the downside, in case the bears seize control, support may be found near the 6645 area, marked by the lows of March 2, with further declines likely to open the way for the index’s recent lows, at 6164.
Related Posts: