Please ensure Javascript is enabled for purposes of website accessibility

Dow Sets a New Record, but It's Not a Good One

By Matt Thalman - Apr 15, 2013 at 9:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Stocks fall on news of China's slow economic growth, but they shouldn't have.

Over the past few weeks, the Dow Jones Industrial Average (^DJI 0.87%) has been setting new records nearly every day. In March, the index set a new all-time high nine days in a row, but today, the index set a different record. With the Dow dropping 265 points, or 1.79%, it set the record for the worst day of 2013. The S&P 500 also performed poorly today, as it lost 2.3%, while the Nasdaq lost the most, 2.38%.

This morning, most market participants were blaming the poor economic growth report from China. First-quarter gross domestic product in China grew 7.7% over the same quarter last year, after growing 7.9% during the fourth quarter and when economists expected growth to hit 8%.  

As the closing bell rang, all of the Dow's 30 components were in the red, but I don't believe we should blame China for all the declines. A number of the components are closely tied to commodity prices, and since those fell across the board today, that resulted in a number of stocks falling lower also. This morning, I discussed who exactly fell into that trap, which you can find out by clicking here.

Even though poor economic data coming from China started today's decline, stocks with very little exposure to the country were also pulled lower. For example, shares of Walt Disney (DIS 1.87%) declined 2.76% on very little news today. Although the company does have a park in both Hong Kong and Shanghai, the total parks and resorts revenue is only $3.39 billion of the companies' $11.34 billion in quarterly revenue. Furthermore, the international parks only represent $526 million of that revenue and that segment of the business actually cost Disney $20 million this past quarter.   While I'm not saying that a slowing China economy isn't going to hurt Disney,I do think today's reaction is way overblown and that this price drop represents a nice buying opportunity.

Another overblown reaction by investors hit shares of Coke (KO 0.56%), which fell 2.41% today. In its most recent 10-K, the company said that the Pacific market, which China is part of, represented 11.% of net operating revenue, which is down from 14.1% in 2010 and 11.7% in 2011.  When that is compared to North America, which represents 45% of revenue, or Europe, which accounts for 9.3%, it's easy to see that China plays a part in Coke's total revenue stream, but Coke has been growing its revenue in other areas of the world faster than China for a few years. Investors should have already seen this and not expected massive growth out of China in the future, which again leads me to believe that today's drop is an overreaction and opens up a buying opportunity.

Shares of Home Depot (HD 2.52%) also declined by 1.89% today. Since the home-improvement store no longer has locations in China, we can't blame that country's poor GDP growth on the stock's decline. But what we can blame is the NAHB/Wells Fargo Housing Market index, which fell to 42, while analysts expected a reading of 45 after March's 44. Anything over 50 indicates positive sentiment from homebuilders. Home Depot's largest competitor Lowe's (LOW 2.75%) saw its shares fall 2.6% on the news, while shares of the publicly traded homesbuilders fell even further than that.  

More Foolish insight


 
 
 
 
 
 
 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$32,206.87 (0.87%) $278.25
The Coca-Cola Company Stock Quote
The Coca-Cola Company
KO
$64.38 (0.56%) $0.36
The Walt Disney Company Stock Quote
The Walt Disney Company
DIS
$103.49 (1.87%) $1.90
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
HD
$295.19 (2.52%) $7.27
Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
LOW
$189.69 (2.75%) $5.07

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
322%
 
S&P 500 Returns
116%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.