On Friday, the Dow Jones Industrials (DJINDICES:^DJI) ended the week on a dramatic down note, with the average closing with a 139-point loss that wiped out gains from earlier in the week. Most investors blamed escalating tensions between Ukraine and Russia for the decline, along with mixed earnings reports from key companies both within and outside of the Dow. Yet even in the middle of the downdraft, McDonald's (NYSE:MCD) and Wal-Mart (NYSE:WMT) actually gained ground today. How did these stocks manage to climb?
Throughout 2014, bullish Dow investors have been thwarted by the index's inability to set new all-time record highs. The S&P 500 and other indices have risen to unprecedented heights at various times during the year, but the Dow has always fallen short. Part of the problem is that several high-growth companies in the Dow have had a disproportionate downward impact on the average, particularly among the higher-priced components that carry the most weight within the 30 blue-chip stocks.
From a longer-term view, over the past several years, investors have gotten used to the Dow making small declines only to follow with further advances. That made many investors reluctant to dive into lower-growth, more conservative names like McDonald's and Wal-Mart, because such low-risk stocks didn't offer as much upside potential.
Now, though, nervous investors are finally starting to consider that the Dow might be preparing for a long period of lackluster performance or even a full-fledged correction. Under those circumstances, companies that will behave predictably rise in value -- even if "predictable" means having lower growth potential than riskier peers.
In addition to their defensive characteristics, both McDonald's and Wal-Mart have taken steps recently to try to reawaken their growth prospects. Executives in the fast-food giant's conference call this week identified the need to use data analytics and marketing prowess to work with customers to develop a core menu and give them better value for their money. Wal-Mart, meanwhile, has gone through some corporate reorganization, replacing the executive in charge of its Asian region in favor of the person who had managed its China divisional operations. Clearly, Wal-Mart hopes to bolster its international success in the face of slowing economic conditions in the region. Investors in both stocks like the combination of striving for growth while offering relative safety and security.
The one thing investors should be careful about with defensive stocks is valuations. Neither Wal-Mart nor McDonald's is particularly cheap at current levels, especially considering their growth challenges. That could leave them vulnerable in a downturn. Nevertheless, that won't stop McDonald's or Wal-Mart stock from continuing to climb if enough conservative investors decide they'd prefer those companies' stability to the other stocks with greater growth prospects.