As the Nasdaq Plunges, Does the Dow Really Matter Anymore?

The Dow Jones Industrials seem to have given up their leadership role. Should you be concerned?

Apr 10, 2014 at 12:30PM

The Dow Jones Industrials (DJINDICES:^DJI) gave up its early gain Thursday to fall 130 points, or 0.8% as of 12:30 p.m. EDT. But as has happened with increasin,g frequency lately, the Nasdaq Composite (NASDAQINDEX:^IXIC) provided the direction of the broader market, and it was down more than 2% on the day. Given how much more volatile the Nasdaq has been lately, and how much attention it's getting, have the Dow Jones Industrials become essentially irrelevant?

What's happening to the stock market?
Experienced investors know the Nasdaq Composite is usually more volatile than the Dow Jones Industrials, by virtue of the Nasdaq encompassing more high-growth stocks that introduce uncertainty for investors. That greater exposure to higher-growth, higher-risk stocks can cut both ways for investors. Over the past year, for instance, you can see just how much more strongly the Nasdaq Composite has performed than the Dow:

^IXIC Chart

Nasdaq data by YCharts.

Those gains came from several sources. Biotechnology stocks performed extremely well during 2013, with even the largest-cap stocks in the sector producing amazing gains that helped lift the Nasdaq Composite sharply. Many social-media stocks trade on the Nasdaq, and combined with other technology names, they also contributed to the index's outperformance. Finally, high-flying stocks related to alternative energy, including electric-car manufacturer Tesla Motors (NASDAQ:TSLA) and residential-solar giant SolarCity (NASDAQ:SCTY), tend to be in the Nasdaq Composite, while the Dow's exposure to alternative energy comes largely through conglomerates for which the sector is only a small portion of their overall business.

The higher they climb, the harder they fall
Over the past month, though, the Nasdaq Composite has fallen sharply even as the Dow Jones Industrials have held their own:

^IXIC Chart

Nasdaq data by YCharts.

That reversal of fortune reflects a loss of confidence among investors that the huge gains that high-flying stocks have experienced are sustainable. SolarCity has plunged along with most other solar companies, even thoughthe industry's prospects appear bright for 2014. Momentum-driven investors have fled from SolarCity's falling stock, exacerbating its decline even as residential solar becomes more popular and the company retains a commanding presence in the industry.

Similarly, Tesla Motors has had to endure several negative news items lately, including controversy over its direct-sales model in New Jersey and the reduction of vital tax credits in California. Tesla Motors has seen its share price quintuple over the past year, even including a nearly 20% sell-off over the past month. Yet Tesla Motors is still working hard to boost its growth, with a new lease-financing option for business owners that could produce more sales and set the stage for broader lease options down the road.

Don't give up on the Dow
The Dow Jones Industrials will never have the speculative, up-and-coming growth stocks that the Nasdaq Composite has, and that in turn will make the Dow look less like a leader and more like a follower of the Nasdaq during volatile markets -- in either direction. Only by looking at both indices can you get a fuller picture of the health of the stock market as a whole.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends SolarCity and Tesla Motors. The Motley Fool owns shares of SolarCity and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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