Dow Falls for the Quarter, But Don't Count 2014 Out Yet

Investors in the Dow Jones Industrials (DJINDICES: ^DJI  ) are faced with something they haven't seen in five years: negative performance for the first quarter of the year. While the Dow's gain today could not wipe out the average's 119-point decline for the last three months, investors should remain optimistic that the stock market can overcome its winter slump and still post a gain for the full year.

Looking back at bad times
Fearful investors will focus on 2008, in which the Dow's 7.5% drop in the first quarter was merely a foreshadowing of things to come -- the blue-chip index eventually lost 34% on the year as the financial crisis forced the stock market down sharply. Those who believe the stock market has risen too far over the past five years of a raging bull market are concerned that 2008's history might repeat itself.

Yet what many investors have forgotten is that the Dow has often overcome first-quarter slumps to finish with a substantial gain for the full year. The much-celebrated 2007 was such a year, as a small 1% drop in the first quarter didn't hold back a spring and summer rally that sent the market to what would be its final all-time high for years. Even losses during the last quarter of 2007 couldn't keep the Dow from climbing more than 6% for the full year.

Even more telling is the index's streak from 2003 to 2005, in which the Dow lost ground during every single first quarter and yet managed to catch up and post gains on an after-dividend basis. The most remarkable year of the three was 2003, which posted a 25% gain for the full year coming out of the 2000-2002 bear market.

Image courtesy www.marketsandcompanies.com.

What will drive the Dow in 2014
Investors need to remember that the Dow is only a conglomeration of 30 individual stocks, each of which can move in their own separate ways. Even with the Dow's decline, for instance, Caterpillar (NYSE: CAT  ) has managed to post substantial gains on hopes that it will follow a recovery in construction activity and a hoped-for bounce in commodity prices to regain more of the ground the stock has lost. Merck (NYSE: MRK  ) has managed to move beyond its patent-cliff woes of the past several years, and has recently had good news from its extensive and growing pipeline of drug candidates. Caterpillar and Merck might be among the strongest performers in the Dow, but the other companies in the average also have plenty of things going for them that could drive a rebound later in the year.

Many investors will look at the Dow's first-quarter loss and give up hope for 2014. That would be premature, though, and smart investors will look past the first quarter to find opportunities for profits wherever they may be.

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