Please ensure Javascript is enabled for purposes of website accessibility

How 2 Rising Fears Could Keep the Dow on the Defensive

By Dan Caplinger - Feb 5, 2014 at 11:00AM

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

Falling markets always look for catalysts, and two important ones are starting to rear their heads again.

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.

After a one-day respite, stock markets are falling again, with the Dow Jones Industrials (^DJI 0.09%) losing 44 points as of 11 a.m. EST. Broader markets are posting larger declines, and two main culprits appear to be at fault: economic data and the return of the debt-ceiling debate. Sizable drops in shares of Boeing (BA 0.52%) and United Technologies (RTX -1.97%) explain how both of these factors are in play in the stock market's downward moves lately.

The five-year bull market in stocks has rested on the foundation of economic recovery following the financial crisis, and in the U.S. particularly we've seen solid gains in employment and GDP growth, albeit not necessarily at the pace that many would prefer. More recently, though, there have been hints of slowing growth. This morning's disappointing ADP private-sector jobs report added to fears that the recovery might actually be coming to an end just as the Federal Reserve had hoped to take away the support it instituted to prop up economic prospects. Bulls point to one-time seasonal factors as explaining the negative data, but it'll take time to prove or disprove their theory.

Meanwhile, Washington is also having its traditional influence on the stock market, as an imminent return of the debt-ceiling debate once again threatens the creditworthiness of the U.S. and introduces new unpredictability into the financial markets. In particular, the possibility of further austerity measures like the sequestration provisions explains at least part of the steep declines in Boeing and United Technologies today, as both companies have extensive exposure to the U.S. budget through their military sales. Until politicians come to a lasting resolution of the nation's debt and the role Congress should play in limiting it, investors will hold their breath and hope that Washington doesn't do anything that irrevocably damages the financial markets.

In the end, though, investors need to look beyond general trends to find companies that can take advantage of positive factors while overcoming negative ones. Merck (MRK 1.24%), which was up more than 1.5% this morning, provided a good example in its most recent quarterly report. Even though the drugmaker experienced drops in revenue and net income due to sales of generic versions of its off-patent drugs, it also announced a potentially lucrative collaboration with other pharma giants.

Fears of poor data and problems like the debt-ceiling debate could send the Dow down in the short run. But in the long run, those fears will most likely disappear, leaving smart investors with an opportunity to pick up shares of the stocks they want on the cheap. That's a trade-off that any long-term investor should be willing to make.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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
$32,832.54 (0.09%) $29.07
The Boeing Company Stock Quote
The Boeing Company
BA
$165.89 (0.52%) $0.85
Merck & Co., Inc. Stock Quote
Merck & Co., Inc.
MRK
$88.49 (1.24%) $1.08
Raytheon Technologies Corporation Stock Quote
Raytheon Technologies Corporation
RTX
$91.20 (-1.97%) $-1.83

*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 analyst team.

Stock Advisor Returns
377%
 
S&P 500 Returns
123%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/09/2022.

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.