The Dow's Plunge Goes Well Beyond Europe

Don't be too quick to blame Europe for the Dow's problems.

Jul 10, 2014 at 11:00AM
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On Thursday morning, concerns in global financial markets sent the Dow Jones Industrials (DJINDICES:^DJI) to a steep decline, with the index falling more than 1% after the opening bell before narrowing its loss to 0.54% as of 11 a.m. EDT. Most of the attention focused on concerns about a possible Portuguese financial crisis spreading across the continent and undercutting the progress that the European Central Bank and other policymakers have made in recent years toward stabilizing the eurozone's economy. Yet with Home Depot (NYSE:HD) and Nike (NYSE:NKE) being among the worst performers in the Dow so far today, there are clearly other factors hitting the stock market beyond a possible European problem.

Hd

Home Depot fell about 1.4% as earnings warnings from some of its home-improvement industry peers pointed to potential sales shortfalls for the quarter. Even with the housing market remaining relatively strong and the U.S. economic recovery seemingly back on track after a tough winter quarter, sales of items such as flooring and lawn and garden products forced some niche specialists in those areas to cut their guidance for second-quarter results. Analysts quickly extrapolated that poor performance to larger home-improvement retailers such as Home Depot. With so much of Home Depot's business relying on U.S. households doing renovation and remodeling projects -- whether on their own or through building contractors who are Home Depot customers -- today's drop makes it clear that concerns about the U.S. economy are also weighing on the Dow Jones Industrials.

Soccer Ball

Nike dropped 1.3% as investors assessed the company's performance at the 2014 World Cup in Brazil in the context of the impact on future sales. With pre-tournament favorite Brazil now struggling to win its third-place game and both championship contenders in Sunday's final wearing jerseys from Nike rival Adidas, many investors might well conclude that the company's foray into soccer was a waste of marketing money. Moreover, Nike's decision to end its relationship with the English Premier League organization Manchester United seems to further support the reining-in of spending on soccer. Yet Nike has worked hard to increase its sales in key international markets, and even if U.S. visibility of soccer as part of Nike's overall business strategy wanes in the months after the World Cup ends, the sport will remain an integral part of the company's global future. Economic trouble in Europe could put a dent in Nike's ambitious plans, but the sports apparel giant has had more difficulty in parts of the world that would likely be unaffected by any European crisis.

The Dow is part of the global market, and so Europe's problems will inevitably have an impact on the index. But don't be too quick to judge that all of today's decline is due to European concerns. Otherwise, you might miss other economic headwinds that could prompt further drops for the Dow.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Home Depot and Nike. The Motley Fool owns shares of Nike. 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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