Why the Dow Is Sagging Today

Despite better-than-expected consumer-confidence numbers, the Dow Jones Industrial Average (DJINDICES: ^DJI  ) is nearly 0.33% cheaper today after the Chinese government moved to cut excess supply in China. Investing is one of the few arenas in which people get disappointed by lower prices. As of 1:25 p.m. EDT the Dow is down 52 points, or 0.33%, to 15,504. The S&P 500 (SNPINDEX: ^GSPC  ) is down 0.2% to 1,687.

Consumer sentiment rose from June's 83.9 to 85.1 in July, the highest level in exactly six years. Analysts had expected consumer sentiment to rise to 84. While consumers were optimistic about the economy, next week will provide much better measures of how well the U.S. economy is doing. On Wednesday the government reports the advance look at GDP, while ADP will report on private-sector employment. Then on Friday the government reports its employment report, as well as the personal consumption expenditures price index, the Federal Reserve's favored measure of inflation.

Despite consumers' positive sentiment, the market is flagging after the Chinese government directed 1,400 companies in 19 industries to cut excess capacity by the end of the year. The Ministry of Industry and Information Technology published a list of specific production facilities it has ordered to be closed. This will likely slow Chinese GDP growth going forward, and it's the reason most energy commodities and metals are down for the day.

It's interesting to see a centrally planned economy at work. Many industries, including steel and aluminum, have been hurt by an abundance of supply, particularly in China. While in a normal market you would see supply get cut after prices dropped below the production cost, in many industries supply has been increasing as local Chinese governments spur factories on because they provide large numbers of jobs. The recent government order, if followed, should help bring excess supply down. The flip side, though, is that demand will also likely fall, so it's a double-edged sword.

Alcoa (NYSE: AA  ) is one of the companies that have been hit hard by an oversupply in China, and its stock is up 0.34% on the news today. Over the past five years, the price of aluminum has dropped by nearly 40%.

Source: World Bank. IndexMundi.com.

Alcoa has cut production at its highest-cost facilities, but the industry continues to struggle from oversupply. Alcoa should benefit from the cut in supply, but it will struggle with any fall in demand in China.

There will be winners and losers as the Chinese government tries to shift its economy away from large government-driven projects and toward a consumer-based economy. The Motley Fool's free report "3 American Companies Set to Dominate the World" shows you three companies that will profit from China's growing middle class. Click here to get your free copy before it's gone.


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