Does the Dow Have Further to Fall? Look at Last Week's Losers for the Answer

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

The Dow Jones Industrials (DJINDICES: ^DJI  ) dropped 3.5% last week, posting its worst weekly performance in more than two years and creating huge amounts of anxiety among investors that further losses could be imminent. In order to assess the true threat of an extended downturn, it's helpful to ask which stocks contributed the most to the Dow's declines last week. With that in mind, let's look at DuPont (NYSE: DD  ) , General Electric (NYSE: GE  ) , Caterpillar (NYSE: CAT  ) , and Travelers (NYSE: TRV  ) to identify why they led the Dow downward last week -- and to look for signs of whether we're about to see even scarier drops in the days and weeks ahead.


Source: Wikimedia Commons.

3 strikes against industrial stocks
It shouldn't come as a big surprise to see three major industrial stocks at the top of the decliners' list, given the initial cause of the declining markets last week. DuPont and General Electric both fell more than 6%, with Caterpillar dropping 5.75% in the wake of economic-growth concerns that started in China and spread across the emerging-market world.

For DuPont, emerging markets stand to become an increasingly important part of its business as the company shifts more toward agricultural pursuits. Even though the company has an extensive client base in developed nations, the prospects in emerging-market areas like Africa to take greater advantage of available cropland could point to incredible growth for DuPont. Yet if emerging-market economies start to see a rise in systemic risk, it could raise barriers to entry for DuPont and other agriculturally focused companies in those nations, posing a threat to the company's new business strategy.

Similarly, Caterpillar has relied extensively on China and other rapidly growing areas as a source of revenue, and signs of slowing growth in China have weighed on the stock for well over a year now. If currency crises in Turkey and Argentina spread throughout their respective regions, it could make it a lot more difficult for Caterpillar to find customers willing to make capital expenditures on heavy equipment. Moreover, as long as the mining industry has to suffer from low commodities prices, Caterpillar's mining-equipment business likely won't recover either.

General Electric faces some of the same challenges as Caterpillar, given its own presence in the mining-equipment industry. Yet GE's drop is troubling for a different reason, as the conglomerate has increasingly gotten into the booming energy industry as a source of growth potential. So far, oil and gas companies have held up reasonably well, but a more extensive global economic slowdown could lead to weakening prices and curtail the exploration and production activity that has led to more profits for GE.

Looking at the financials
Meanwhile, Travelers' 5.6% drop last week showed how even positive results can lead to poor performance after a major bull market. The insurance giant's profits rose substantially, as another favorable quarter from a catastrophic-loss perspective led to dramatic improvements in Travelers' bottom line.

But what often happens toward the end of bull markets is that even good results prove insufficient to send stocks ever higher, as investors simply run out of steam. Especially given the huge recovery we've seen in financial stocks in the past five years, taking a pause could result in giving back a fraction of those gains without necessarily indicating a permanent shift against their business fundamentals.

At this point, having gone so long without any kind of substantial pullback, the Dow could indeed keep falling. The question, though, is how much damage foreign economies will do to the U.S. and to the multinational corporations that make up the Dow along the way. In the long run, investors should focus on the long-term prospects for economic growth throughout the world and start making lists of what they'd like to buy in an extensive pullback.

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Read/Post Comments (3) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 26, 2014, at 9:58 AM, funfundvierzig wrote:

    Not once in the past 16 years has the severe cost cutting and dramatic shrinkage of the DuPont Company by its lacklustre leaders resulted in "incredible growth". We don't envision the latest act of shrinkage by DuPont Chieftess Ellen Kullman, turning her back on two centuries of core competency in chemicals, to lead to "incredible growth" in the agricultural arena or any other business.

    Merely the individual opinion of one retail investor with no position in DD...funfun..

  • Report this Comment On January 26, 2014, at 1:09 PM, calvin5wagner wrote:

    with so much of our wealth tied up in foreign and unfriendly nation's dollars, we are ripe for a catastrophy.

  • Report this Comment On January 26, 2014, at 9:52 PM, mansourg54 wrote:

    Most US companies depend on foreign markets in developed and under developed countries. To preserve your wealth invest in two US companies MO and T and sleep well.

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